UK Finance has today unveiled its comprehensive update on the buy-to-let (BTL) market for the first quarter of 2024, alongside a detailed report titled “The Shape of Buy-to-Let.” This report delves into the factors driving landlords into arrears, revealing a landscape fraught with difficulties.
Market Contraction
The volume of lending for BTL house purchases has experienced a dramatic decline. New mortgage loans plummeted from 25,280 in Q4 2022 to 12,422 in Q1 2024. For the first time, the number of outstanding BTL mortgages also saw a decrease, dropping from 2.039 million in Q1 2023 to 1.98 million in Q1 2024.
Interest Rates and Regulatory Impact
The sharp rise in interest rates has been a critical factor in this downturn, making it increasingly challenging for prospective BTL property buyers to meet lenders’ affordability criteria. Furthermore, the market has been burdened by the 2016 stamp duty surcharge on additional properties and the phased elimination of higher-rate income tax relief on mortgage payments for rental properties.
Profitability Under Pressure
Although rental prices have risen, the costs associated with being a landlord have surged, reducing profitability. In Q1 2018, the average interest cover ratio stood at 342%, but this figure has plummeted to 191% in Q1 2024, highlighting the financial strain on landlords.
Mortgage Preferences and Arrears
A significant majority of BTL borrowers—90%—opt for fixed-rate mortgages. However, a notable portion of BTL mortgages remain variable, contributing to a higher incidence of arrears. By the end of Q1 2024, there were 13,570 BTL mortgages in arrears, representing 0.68% of the total, a figure unchanged from the previous quarter.
Shift Towards Corporate Structures
Tax changes introduced in 2016 and 2017 have driven many landlords to establish company structures for their BTL ventures. Currently, 10% of BTL mortgages are held by landlords operating as companies, a trend likely to continue as the market adjusts to ongoing challenges.
Single-Property Landlords Vulnerable
Despite these shifts, one-third of BTL mortgages are still held by single-property landlords, most of whom are not structured as companies. These landlords face heightened vulnerability to rising interest rates, lacking the financial buffer of a broader property portfolio.
Possessions and Court Activity
The first quarter of 2024 saw 600 BTL possessions, a 40% increase from 430 in Q1 2023, though still below pre-pandemic levels. This rise is attributed to the normalization of court activities post-pandemic.
Support for Struggling Borrowers
UK Finance emphasizes the support available to those struggling with mortgage payments. Borrowers are encouraged to contact their lenders early to explore available support options without fear of impacting their credit scores.
Expert Insights
James Tatch, Head of Analytics at UK Finance, remarked on the resilience of landlords despite the challenges posed by regulatory changes and rising interest rates. He highlighted the importance of a flexible and well-managed private rental sector and urged the government to provide viable alternatives to Section 21 “no fault” eviction notices for responsible landlords.
Tatch expressed cautious optimism, suggesting that with stable rental demand and stringent lending standards, the BTL sector might recover from last year’s downturn sooner than anticipated, with limited further increases in arrears.