The Hamptons Letting Index for February showed that 61 per cent of investors who bought a buy-to-let property in the South of England used cash, which was a new high for the index. This is also up from a low of 47 per cent in 2022.
Some 67 per cent of buy-to-let purchases in London were mortgage-free, 23 per cent more than in 2022.
Across Great Britain, 59 per cent of buy-to-let purchases have been made with cash so far this year, which is six per cent higher than the same period a year ago. It is also the highest share of buy-to-let purchases made with cash in six years.
All recorded regions showed a rise in purchases being made with cash rather than a mortgage, except for the North West which recorded a two per cent fall to 61 per cent, and the North East which saw a three per cent drop to 52 per cent.
Hamptons said this was because yields tended to be higher in these regions, so investors were more likely to pass lenders’ stress tests and still make money with a mortgage.
Aneisha Beveridge, head of research at Hamptons, said: “Against a backdrop of higher mortgage rates, investors are adapting. So far this year, 12.1 per cent of homes sold in Great Britain were purchased by a buy-to-let landlord, the same level as in 2022.
“While existing investors are paying down debt, new investors, particularly those wanting to buy in the lowest yielding parts of the country, are choosing cash to ensure the sums stack up. Overall, this is set to shrink the total mortgage bill for buy-to-let in 2023.”
She said the sub-two per cent mortgage rates seen over the last few years meant landlords who could buy homes outright were taking advantage of low rates instead.
She added: “Many investors spread their cash as far as it could go by topping it up with low borrowing costs to maximise their returns. However, today, investors are having to dig deeper into their savings to ensure the sums stack up on any new buy-to-lets.”
More cash purchases in lower yield regions
The average gross yield for a landlord buying a property in the South of England over the last 12 months came to 5.4 per cent, which is lower than some recent mortgage rates.
The latest data from Moneyfacts showed that as of March, average rates for buy-to-let mortgages stood at 5.81 per cent for a two-year fix and 5.72 per cent for a five-year fix.
In the North, the average yield over the last 12 months has come to 7.5 per cent.
The index found that in regions where the average yield was less than five per cent, 71 per cent of purchases so far this year were being made with cash. This is up from half in 2022.
Hamptons said this showed that landlords had changed their strategy.
The report said: “Given that these properties are often located in the most expensive parts of the country, previously, when rates were lower, investors would use a mortgage to bridge the gap between their savings and the purchase price.
“But at today’s rates, it’s harder for investors to pass a lenders’ stress test meaning more are having to rely on cash to fund their purchase.”
In regions where the average yield is higher than eight per cent, more mortgaged purchases are being made.
Hamptons estimated that based on the average mortgaged investor paying £187,110 for their property and putting down a 25 per cent deposit, moving to cash ownership would save new landlords around £61.9m in mortgage interest payments this year.
By contrast, new investors using a mortgage could collectively pay £405m in mortgage interest payments this year with a 75 per cent loan to value (LTV) mortgage at 5.27 per cent. This is higher than the collective £347m interest payment that would have been made last year when there were more new investors.
Higher rents
London saw the largest growth in average rents with a 14.4 per cent annual increase to £2,882 in inner London and a 13.8 per cent growth to £2,026. On the whole, average rents in the capital rose by 13.8 per cent or £262 to £2,161.
This was followed by the Midlands and the North, where rents rose by 10.7 per cent and 9.3 per cent respectively to £870 and £824.
Hamptons said other Southern regions where affordability was “most stretched” were falling behind in rental growth.
The South East saw rents rise by 8.9 per cent to £1,308 while in the South West a 4.5 per cent growth put the average rent at £1,079.
Across Great Britain, average rents increased by 10 per cent to £1,230.
Much of this rental growth is caused by smaller homes, as Hamptons’ index found that the rent for a one-bed had risen by 13 per cent year-on-year in February. This was more than triple the 4.5 per cent rise in rent which was recorded last year.
Rental growth for a three-bed fell from 10.6 per cent in February 2022 to 8.7 per cent this year.
Beveridge added: “Rental growth accelerated last month, marking the second strongest rate of growth recorded since our lettings index began. While the number of rental homes coming onto the market rose for the fifth consecutive month, unlike in the sales market, demand from new renters remains up year-on-year too.”
