Landlords who are relatively heavily leveraged and achieving gross yields much below 5% could be better off reducing their mortgage balance than purchasing another property, according to new market analysis.

Hamptons' annual overview of the rental market explains that higher interest rates mean investors need to focus on yield more than ever before. On paper, the average landlord now needs to be earning a gross yield in excess of 4% to turn a profit. This is based on a lower-rate taxpayer or limited company landlord who owns a �200k buy-to-let with a 60% LTV mortgage.

Maintenance costs

By contrast, in 2020, when rates were lower, investors could still make money with yields of 2%. Higher-rate taxpayers now need a yield of at least 5% to stay out of the red once mortgage payments, maintenance costs and tax have been accounted for.

For newer landlords, higher rents will help to maintain their margins, according to Hampton's report, Rewriting the rules: have higher interest rates broken buy-to-let?

Capital growth

While some may historically have been willing to accept small monthly returns in exchange for the promise of stronger capital growth, tomorrow's landlords will increasingly need to make sure their new purchase washes its face with some wriggle room each month, rather than relying on price growth to boost returns when they eventually come to sell.

It adds: 'Taken together, higher interest rates and government reform of the sector is likely to make buy-to-let a longer-term game. Slower price growth will make it less tempting to sell up and cash in, while the additional time it takes to build equity means it will be slower to scale up. Therefore, we expect landlords who are buying today to own the property for considerably longer than an investor who bought in a decade ago.'�