The volume of lending for buy-to-let (BTL) house purchases dramatically decreased in 2023, according to recent data from a banking and finance industry body. The number of new BTL mortgage deals plummeted from 25,280 in the fourth quarter of 2022 to just 12,422 in the first quarter of this year.
UK Finance attributed this sharp decline to rapidly increasing interest rates, which have made it more difficult for prospective BTL buyers to meet lenders’ affordability tests. Additionally, the stamp duty surcharge on second and subsequent properties, implemented in 2016, and the gradual elimination of higher-rate income tax relief on mortgage payments for rental properties have further challenged and deterred landlords.
The BTL mortgage market saw a contraction, with the total number of outstanding BTL mortgages dropping from 2.04 million in the first quarter of 2023 to 1.98 million in the first quarter of 2024. Notably, landlords who own just one property constitute one third of the BTL market, while 10% of BTL mortgages are held by landlords operating as companies.
At the close of 2023, there were 13,570 BTL mortgages in arrears. This figure remained steady in the first quarter of 2024, representing a mere 0.68% of all BTL mortgages. Mortgage lenders continue to offer tailored support for those struggling with their payments.
Despite rising rents, landlords’ profits have been squeezed due to increasing costs. The average interest cover ratio, which measures the extent to which rental income covers mortgage costs, fell from 342% in the first quarter of 2018 to 191% in the first quarter of 2024. Over the past two years, 90% of new BTL lending has been on a fixed-rate basis. However, a larger proportion of BTL mortgages remain on variable rates compared to the residential sector, contributing to a higher rate of arrears among BTL mortgage holders.
James Tatch, head of analytics at UK Finance, expressed cautious optimism: “Without more unexpected negative shocks, strong rental demand and strong lending standards could mean the buy-to-let sector emerges from last year’s downturn sooner than previously expected, also that further rises in arrears are limited.”