Amar Riaz is preparing to put up rents for some of his tenants who are mid-contract for the first in almost 20 years.

Riaz, 52, who owns rentals in London, Cambridge, Birmingham and Manchester, has no other way to combat the steep rise in his mortgage costs.

He has just remortgaged a one-bedroom flat in Birmingham and repayments on the £102,000 loan are going from £288 to £506 a month on his new three-year rate at 5.85 percent.

Monthly payments on a flat he owns in Chelsea are likely to increase from £458 to £1,275 at the end of the year.

“This is the first time I have had to inform active tenants that their rent is increasing. It’s a very difficult conversation. It’s a difficult thing to have to do, but I would be in a bit of a pinch if I didn’t put the rent up.”

Extra red tape, rising mortgage rates, and the pressure on tenants’ incomes from the cost of living crisis are making it harder than ever to make money from property investment.

Aaron Strutt from the mortgage broker Trinity Financial said: “Landlords have taken a real hammering and the soaring cost of borrowing is the last straw for many.”

The mortgage pinch

Soaring buy-to-let mortgage rates coupled with stricter lending criteria threaten to shrink profits for landlords.

Banks are making more deals available after many were pulled following the former chancellor Kwasi Kwarteng’s now obsolete mini-budget, but rates are far higher than they were.

“A matter of weeks ago a five-year fixed rate loan started with a three — they now start with a five,” said Strutt.

It’s not just mortgage costs causing problems. Landlords are now subject to stricter limits on how much they can borrow and lenders often demand higher deposits.

Lenders have typically asked for 25 per cent as a deposit or equity — it’s now more like 50 per cent, according to Strutt.

“Many landlords will get stuck when it comes to getting a mortgage, whether it’s for a purchase, to refinance or to remortgage. It’s a lottery depending on who the existing lender is as to what criteria you’re up against,” Strutt said. He added that many clients were reverting to variable mortgages for now, in the hope that fixed rates fall in time.

Most buy-to-let landlords take out mortgages on an interest-only basis. This brings the monthly mortgage payments down, meaning there’s more profit each month.

The idea behind a property investment is to hold it for the long-term — perhaps ten years plus — and enjoy the income. When the time comes to sell, the hope is that there will be healthy profit if house prices have risen.

Before 2017, it made sense from a tax point of view too, because landlords could deduct mortgage interest from their profits. This is no longer the case.

Mark Harris, the chief executive of the mortgage broker SPF Private Clients, said: “Any landlord with a capital repayment mortgage will quickly want to switch to interest-only with rates rising fast.”

Eviction woes

Possession claims, where a landlord requests to take back control of their rental property, surged 160 percent between April and June compared with the same period last year.

The number of repossessions granted rose 210 percent from 1,582 to 4,900, according to the Ministry of Justice (MoJ), in part because “no-fault” evictions were banned between August 2020 and May last year because of the pandemic.

However, getting rid of a badly behaved tenant is no easy task and it can take time. MoJ figures show the median time a landlord repossession claim takes is 23.4 weeks.

And it’s about to get harder too. When a landlord wants to evict a tenant they have two options: a Section 8 or a Section 21 notice.

Section 8 can be used where a tenant has rent arrears, has damaged the property, or has given cause for neighbours to complain about anti-social behaviour.

Section 21 is for no-fault evictions, where landlords do not have to give a reason and can give tenants two months’ notice to leave once their fixed-term contract has come to an end.

Under current plans Section 21 evictions will be banned from next year.

As the cost of living crisis pushes more renters into arrears, it could leave many landlords severely out of pocket at a time when they are facing their own cost pressures if they lose the option of using Section 21 to move tenants out.

Red tape

From 2025, all newly rented properties are required to have an energy-efficient EPC rating of C or above. Existing tenancies will have until 2028 to comply.

For many landlords, this change will mean investing in additional insulation, lighting, double glazing, A-rated energy efficient boilers, and smart meters to reach the new minimum energy efficiency standards. The mortgage broker Habito estimates that it will cost an average of £6,000 to bring a property from an E to a C rating.

Older period properties will cost far more to upgrade to meet the new requirements than newer properties, putting more of a dent in profits — or wiping them out altogether for a time.

Limited company limitations

Many landlords have moved properties from personal ownership into a limited company so they can claim mortgage interest as a tax-deductible expense.

The total number of companies set up to hold buy-to-let property has doubled since 2017 to more than 300,000.

However, while setting up a limited company is straightforward there are a number of costs involved, particularly with the transfer of property.

The business would need to pay stamp duty on a property you owned in your own name based on a valuation today — not when you bought it. Investors will also need to pay the 3 percent additional rate for second homes.

Nimesh Shah, the chief executive of the accountancy firm Blick Rothenberg, said: “You must factor in capital gains tax on selling a property — to then be repurchased by the company — of up to 28 percent, based on its current valuation. There are also running costs to factor in such as accountancy fees to file accounts. In general, there will be much more paperwork.”

Property investors using a limited company could soon pay higher taxes. Corporation tax must be paid on profits in a limited company, currently at 19 percent, but rising to 25 percent from April.

Shah added: “This means that the effective tax could be higher than what you’d pay for owning property in your own name.

Limited companies don’t have such a large range of buy-to-let mortgages open to them. This could mean having to settle for a more expensive deal.

What’s next for investors?

Faced with so much uncertainty, many landlords are now eager to sell up.

Harris suggested this could trigger a buying opportunity for landlords with large portfolios:

“There will be properties available at a good price for those with plenty of cash to spare.”

Other landlords are concerned about rent arrears — nearly 39 percent of tenants reported difficulty paying their rent, according to new figures from the Office for National Statistics.