To Beat Mortgage Rates, Real Estate Investors are Turning to Cash

Rising Mortgage Rates

As a result of the high cost of borrowing money, almost two-thirds of London’s landlords make their purchases with cash.

Because of the exorbitant cost of mortgages, a record number of landlords who invest in buy-to-let properties are opting to pay cash instead.

According to the estate brokers in the Hamptons, 6 out of 10 investors (61 percent) who bought houses cash paid this year in the South. This percentage is up from the low of 47 percent in 2022.

Since we started keeping records in 2009, this is the highest level ever recorded.

The greatest increase in the number of cash investors in buy-to-let properties was seen in London, with a 23 percent surge over the previous year.

This year, 67% of landlords in the nation’s capital are paying their tenants in cash, which is an increase from 43% in 2022.

According to the estate firm, switching to cash purchases is estimated to save landlords a combined total of £62 million in interest payments in mortgages in just this one year.

According to Aneisha Beveridge, who works for the company, investors are adjusting to an environment with higher interest rates.

She stated that current investors are focusing on paying down their debt, but new investors, especially those who want to buy in the parts of the country with the lowest yields, are choosing cash investments to ensure that their calculations are accurate.

She stated that landlords who were in a position to buy houses outright would often choose mortgage packages with interest rates lower than 2% so that they could extend the value of their money to the greatest possible extent that it would go, often purchasing multiple properties.

Now, though, investors are being forced to make larger withdrawals from their funds.

Cash purchases give landlords the opportunity to increase their returns while also sidestepping the stress tests imposed by lenders, which are creating it more difficult to obtain a mortgage.

In order to qualify for a mortgage for an investment property, taxpayers pay the basic rate, and limited corporations need to demonstrate that the revenue from the rental property is sufficient to cover 125% of the mortgage repayment costs.

This indicator, which is known as a “interest coverage ratio” or ICR, has a value of 145 percent for taxpayers who are subject to higher rates.

Properties having an ICR that is lower than 110 percent will no longer be eligible for mortgage financing and may be subject to normal variable rates, which are higher.

There is a cap on how much additional rent a tenant is willing to pay, although rents can be raised to satisfy these requirements if necessary.

Compared to 47 percent the previous year, 65 percent of buy-to-let investors in the South East are paying in cash for their investments.

At the same time span, the share in the South West has increased from 52 percent to 63 percent.

The situation is very different in the North West and the North East, both of which are located in England. In these regions, real estate is inexpensive, and landlords continue to take out mortgages. Even with rising mortgage rates, the rents in these areas are still sufficiently high to pay the cost of the mortgages on the homes.

The percentage of cash acquisitions of rental properties in the North East has dropped by 3%, while in the North West, it has dropped by 2%. 52% of buy-to-let properties in the North East and 61% in the North West are purchased with cash.

According to an analyst at Moneyfacts, the average rate for a buy-to-let mortgage with a term of two years increased from 2.77 percent to 5.81 percent over the course of the past year.

As a direct consequence of this, landlords now spend less money purchasing buy-to-let houses. This year, investors in London are spending an average of £341,000 on real estate, which is a decrease from their spending of £450,000 in 2022.