As a BTL landlord, after making your initial investment, you expect to receive a stream of net positive cashflows throughout the life of the investment and capital gains from an appreciation in the value of the property when you eventually sell it.
08/04/2025By Aivanaa Maraea · Co-Founder
Many buy-to-let (“BTL”) landlords are facing severe financial pressures today. The underlying factors generating these pressures are:
a dramatic rise in mortgage rates,
stagnant rental incomes, and
weak property price appreciation.
This article sets out a BTL investment “Base Case” and considers the impact of the different sources of financial pressure.
Base Case
A typical BTL investment involves:
an initial equity investment to fund part of the BTL property’s acquisition cost, with the remaining funds raised through an interest-only mortgage;
thereafter, ongoing cashflows based on rental income minus operating expenses, interest costs and taxes; and
net proceeds from the eventual sale of the property.
As a BTL landlord, after making your initial investment, you expect to receive a stream of net positive cashflows throughout the life of the investment and capital gains from an appreciation in the value of the property when you eventually sell it.
Overall, you might expect to make a c. 11% per annum return on your equity investment, also known as the “internal rate of return” or “IRR”. In simple terms, this is the equivalent of investing £100 of equity upfront and, assuming an investment horizon of five years and no interim receipts, realizing net proceeds of c. £169 at the end of five years (calculated as £100 x (1.11^5)).
The BTL investment Base Case is set out in more detail below:
Item
Assumptions
t0 (start)
t1 (year 1 end)
t2 (year 2 end)
t3 (year 3 end)
t4 (year 4 end)
t5 (year 5 end)
IRR
1
Property purchase price
850,000
2
Stamp Duty Land Tax ("SDLT")
55,500
3
Conveyancing and valuation expenses
3,000
4
Total cost of acquiring property
908,500
5
Equity investment by landlord
333,500
6
Interest only mortgage
575,000
7
5-year fixed mortgage rate
1.7%
1.7%
1.7%
1.7%
1.7%
8
Annual property price appreciation
10.0%
10.0%
10.0%
10.0%
10.0%
9
Property price
935,000
1,028,500
1,131,350
1,244,485
1,368,934
10
Loan-to-value ratio
67.6%
61.5%
55.9%
50.8%
46.2%
42.0%
11
Gross rental yield
4.0%
4.0%
4.0%
4.0%
4.0%
12
Annual insurance and maintenance inflation
5.0%
5.0%
5.0%
5.0%
13
Annualised cashflows
14
Annual rental income
34,000
37,400
41,140
45,254
49,779
15
Annual letting commission
-4,488
-4,937
-5,430
-5,974
-6,571
16
Annual management fee
-2,448
-2,693
-2,962
-3,258
-3,584
17
Annual service charge
-3,000
-3,150
-3,308
-3,473
-3,647
18
Annual insurance and maintenance costs
-800
-840
-882
-926
-972
19
Gross profit before interest
23,264
25,780
28,558
31,623
35,005
20
Annual interest
-9,775
-9,775
-9,775
-9,775
-9,775
21
Cashflow after interest
13,489
16,005
18,783
21,848
25,230
22
Tax @ 20% on gross profit after deduction of 20% of interest
-4,262
-4,765
-5,321
-5,934
-6,610
23
Cashflow after interest and tax
9,227
11,240
13,462
15,915
18,620
24
Property sale price
1,368,934
25
less Interest only mortgage
-575,000
26
less Selling commission (3.6%)
-49,282
27
less Solicitor's fee
-3,000
28
Equity proceeds
741,652
29
Equity proceeds less initial SDLT and conveyancing and valuation expenses
683,152
30
Capital gains tax (“CGT”) @ 28%
-191,283
31
Equity proceeds after CGT
491,869
32
BTL landlord's net cashflows
-333,500
9,227
11,240
13,462
15,915
510,490
11.5%
The IRR of 11.5% under the Base Case is predicated on some fundamental assumptions, which were broadly realistic for some parts of London until about five years ago.
Size of interest only mortgage
Under the Base Case, the purchase price of the property of £850,000 (Item 1) is funded in part by an interest only mortgage of £575,000 (Item 6), with an initial loan-to-value ratio (“LTV”) of 67.6% (Item 10) and an initial interest rate of 1.7% (Item 7).
If the level of borrowing was higher, say £775,000 (at 91.2% LTV) instead of £575,000 (at 67.6% LTV), all other things being equal, the amount of initial equity investment required from the BTL landlord would be lower, £133,500 instead of £333,500, and the expected IRR would increase from 11.5% to 26.2%. Mortgage lenders, however, usually do not allow an initial LTV of more than 60% - 70% and BTL landlords, therefore, typically have no choice but to invest c. 30% - 40% of the upfront investment cost as their own equity.
If, on the other hand, the level of borrowing was reduced to, say, £375,000 (at 44.1% LTV) instead of £575,000 (at 67.6% LTV), all other things being equal, the amount of the BTL landlord’s initial equity investment would increase from £333,500 to £533,500 and the IRR would decrease from 11.5% to 6.5%.
This demonstrates how a BTL landlord’s equity investment would not have been financially worthwhile without the availability of substantial levels of borrowing, even if this is usually capped at 60% - 70% LTV by BTL lenders.
Mortgage rates
However, the Base Case also assumes a benign mortgage rate of 1.7%, which was the reality for mortgage borrowers, including BTL landlords, for a prolonged period, from c. early-2009 until as recently as November 2021.
However, mortgage rates have increased dramatically since November 2021 to a c. 6% level today, creating enormous financial pressure on BTL landlords.
Revised Base Case
The Revised Base Case set out below demonstrates how the increase in the mortgage rate has led to almost catastrophic ongoing negative cashflows for BTL landlords, while also lowering the IRR to 5.4% (if, that is, BTL landlords are able and willing to inject further equity funds into their BTL investment and fight on for five years in the example below).
Item
Assumptions
t0 (start)
t1 (year 1 end)
t2 (year 2 end)
t3 (year 3 end)
t4 (year 4 end)
t5 (year 5 end)
IRR
1
Property purchase price
850,000
2
Stamp Duty Land Tax ("SDLT")
55,500
3
Conveyancing and valuation expenses
3,000
4
Total cost of acquiring property
908,500
5
Equity investment by landlord
333,500
6
Interest only mortgage
575,000
7
5-year fixed mortgage rate
6.0%
6.0%
6.0%
6.0%
6.0%
8
Annual property price appreciation
10.0%
10.0%
10.0%
10.0%
10.0%
9
Property price
935,000
1,028,500
1,131,350
1,244,485
1,368,934
10
Loan-to-value ratio
67.6%
61.5%
55.9%
50.8%
46.2%
42.0%
11
Gross rental yield
4.0%
4.0%
4.0%
4.0%
4.0%
12
Annual insurance and maintenance inflation
5.0%
5.0%
5.0%
5.0%
13
Annualised cashflows
14
Annual rental income
34,000
37,400
41,140
45,254
49,779
15
Annual letting commission
-4,488
-4,937
-5,430
-5,974
-6,571
16
Annual management fee
-2,448
-2,693
-2,962
-3,258
-3,584
17
Annual service charge
-3,000
-3,150
-3,308
-3,473
-3,647
18
Annual insurance and maintenance costs
-800
-840
-882
-926
-972
19
Gross profit before interest
23,264
25,780
28,558
31,623
35,005
20
Annual interest
-34,500
-34,500
-34,500
-34,500
-34,500
21
Cashflow after interest
-11,236
-8,720
-5,942
-2,877
505
22
Tax @ 20% on gross profit after deduction of 20% of interest
-3,273
-3,776
-4,332
-4,945
-5,621
23
Cashflow after interest and tax
-14,509
-12,496
-10,274
-7,821
-5,116
24
Property sale price
1,368,934
25
less Interest only mortgage
-575,000
26
less Selling commission (3.6%)
-49,282
27
less Solicitor's fee
-3,000
28
Equity proceeds
741,652
29
Equity proceeds less initial SDLT and conveyancing and valuation expenses
683,152
30
CGT @ 28%
-191,283
31
Equity proceeds after CGT
491,869
32
BTL landlord's net cashflows
-333,500
-14,509
-12,496
-10,274
-7,821
486,754
5.4%
The reality for many BTL landlords is that they have little choice but to exit their now disastrous BTL investments by resorting to distress sales of their BTL properties.
Pauzible
Pauzible may be able to provide an alternative solution to distress sales by covering the increase in interest costs facing BTL landlords for a period of up to five years, in return for a fair share in the value of their properties.
Rental income
While mortgage rates have risen dramatically since November 2021, rents in parts of London have been stagnant for the last 3 – 5 five years and have, indeed, started to decline slightly in recent months. ONS data suggests however that landlords in most other parts of the country have managed to pass on some or all of the increased mortgage costs to tenants by increasing rents which have jumped 6.2% on average1.
This factor naturally puts even further financial pressure on BTL landlords.
If, as compared to a gross rental yield of 4% under the Revised Base Case above, we were to assume a lower gross rental yield of 3%, all other things being equal, this would result in even worse negative cashflows and even lower IRR (if, that is, the BTL landlord is able to hold on for five years):
Item
Assumptions
t0 (start)
t1 (year 1 end)
t2 (year 2 end)
t3 (year 3 end)
t4 (year 4 end)
t5 (year 5 end)
IRR
1
Property purchase price
850,000
2
Stamp Duty Land Tax ("SDLT")
55,500
3
Conveyancing and valuation expenses
3,000
4
Total cost of acquiring property
908,500
5
Equity investment by landlord
333,500
6
Interest only mortgage
575,000
7
5-year fixed mortgage rate
6.0%
6.0%
6.0%
6.0%
6.0%
8
Annual property price appreciation
10.0%
10.0%
10.0%
10.0%
10.0%
9
Property price
935,000
1,028,500
1,131,350
1,244,485
1,368,934
10
Loan-to-value ratio
67.6%
61.5%
55.9%
50.8%
46.2%
42.0%
11
Gross rental yield
3.0%
3.0%
3.0%
3.0%
3.0%
12
Annual insurance and maintenance inflation
5.0%
5.0%
5.0%
5.0%
13
Annualised cashflows
14
Annual rental income
25,500
28,050
30,855
33,941
37,335
15
Annual letting commission
-3,366
-3,703
-4,073
-4,480
-4,928
16
Annual management fee
-1,836
-2,020
-2,222
-2,444
-2,688
17
Annual service charge
-3,000
-3,150
-3,308
-3,473
-3,647
18
Annual insurance and maintenance costs
-800
-840
-882
-926
-972
19
Gross profit before interest
16,498
18,338
20,371
22,618
25,099
20
Annual interest
-34,500
-34,500
-34,500
-34,500
-34,500
21
Cashflow after interest
-18,002
-16,162
-14,129
-11,882
-9,401
22
Tax @ 20% on gross profit after deduction of 20% of interest
-1,920
-2,288
-2,694
-3,144
-3,640
23
Cashflow after interest and tax
-19,922
-18,450
-16,823
-15,026
-13,040
24
Property sale price
1,368,934
25
less Interest only mortgage
-575,000
26
less Selling commission (3.6%)
-49,282
27
less Solicitor's fee
-3,000
28
Equity proceeds
741,652
29
Equity proceeds less initial SDLT and conveyancing and valuation expenses
683,152
30
CGT @ 28%
-191,283
31
Equity proceeds after CGT
491,869
32
BTL landlord's net cashflows
-333,500
-19,922
-18,450
-16,823
-15,026
478,829
3.8%
Property prices
Property prices have stagnated in parts of London over the last 3 - 5 years and are not expected to appreciate at anything like the high historic rates of c. 10% per annum or more for the next 3 - 5 years.
This exacerbates the financial pressure on BTL landlords even more.
If, as compared to a property price appreciation rate assumption of 10% under the Revised Base Case, we were to assume a lower a property price appreciation rate of 5%, as well as a lower gross rental yield of 3%, all other things being equal, this would result in continuing almost catastrophic negative cashflows and negative IRR (if, that is, the BTL landlord is able to hold on for five years):
Item
Assumptions
t0 (start)
t1 (year 1 end)
t2 (year 2 end)
t3 (year 3 end)
t4 (year 4 end)
t5 (year 5 end)
IRR
1
Property purchase price
850,000
2
Stamp Duty Land Tax ("SDLT")
55,500
3
Conveyancing and valuation expenses
3,000
4
Total cost of acquiring property
908,500
5
Equity investment by landlord
333,500
6
Interest only mortgage
575,000
7
5-year fixed mortgage rate
6.0%
6.0%
6.0%
6.0%
6.0%
8
Annual property price appreciation
5.0%
5.0%
5.0%
5.0%
5.0%
9
Property price
892,500
937,125
983,981
1,033,180
1,084,839
10
Loan-to-value ratio
67.6%
64.4%
61.4%
58.4%
55.7%
53.0%
11
Gross rental yield
3.0%
3.0%
3.0%
3.0%
3.0%
12
Annual insurance and maintenance inflation
5.0%
5.0%
5.0%
5.0%
13
Annualised cashflows
14
Annual rental income
25,500
26,775
28,114
29,519
30,995
15
Annual letting commission
-3,366
-3,534
-3,711
-3,897
-4,091
16
Annual management fee
-1,836
-1,928
-2,024
-2,125
-2,232
17
Annual service charge
-3,000
-3,150
-3,308
-3,473
-3,647
18
Annual insurance and maintenance costs
-800
-840
-882
-926
-972
19
Gross profit before interest
16,498
17,323
18,189
19,098
20,053
20
Annual interest
-34,500
-34,500
-34,500
-34,500
-34,500
21
Cashflow after interest
-18,002
-17,177
-16,311
-15,402
-14,447
22
Tax @ 20% on gross profit after deduction of 20% of interest
-1,920
-2,085
-2,258
-2,440
-2,631
23
Cashflow after interest and tax
-19,922
-19,262
-18,569
-17,841
-17,077
24
Property sale price
1,084,839
25
less Interest only mortgage
-575,000
26
less Selling commission (3.6%)
-39,054
27
less Solicitor's fee
-3,000
28
Equity proceeds
467,785
29
Equity proceeds less initial SDLT and conveyancing and valuation expenses
409,285
30
CGT @ 28%
-114,600
31
Equity proceeds after CGT
294,685
32
BTL landlord's net cashflows
-333,500
-19,922
-19,262
-18,569
-17,841
277,608
-8.3%
Regional variations
While the situation for many BTL landlords in parts of London may be nothing short of being almost catastrophic, forcing them into distressed sales of their BTL properties, the same is not necessarily the case in some other parts of the country. Indeed, gross rental yields in some parts of northern England, for example, are c. 7% - 9%. Moreover, property prices in some parts are expected to appreciate at annual average rates of c. 8% - 10% over the next 3 - 5 years.
So, in conclusion, while a dramatic rise in mortgage rates has created unbearable financial pressure for many BTL landlords in some parts of the country, with this situation being exacerbated further by stagnant rental income in prime central London and low property price appreciation, many BTL landlords in other parts of the country have been able to stave off the pressure due toby bumping up already high gross rental yields and through property price appreciation.
Trader at ASIL, a financial services firm. Provided broad advisory services for a Fixed Income mandate including investments in US RMBS, Trups CDOs etc. Previous experience as client relationship manager, and sales
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