The buy-to-let (BTL) mortgage market in the UK has seen a significant contraction, with the volume of lending for BTL house purchases more than halving in 2023. According to UK Finance, new mortgage deals for BTL properties dropped from 25,280 in Q4 2022 to 12,422 in Q1 2024. Rising interest rates have made it increasingly difficult for potential landlords to pass affordability tests, contributing to this sharp decline.
Impact of Economic and Policy Changes
The number of outstanding BTL mortgages also saw a slight decrease, from 2.039 million in the first quarter of last year to 1.98 million in the first quarter of this year. Factors such as the stamp duty surcharge on additional properties, introduced in 2016, and the gradual phasing out of higher-rate income tax relief on mortgage payments have further complicated the landscape for BTL landlords.
Despite rising rents, the increasing costs of being a landlord have made the sector less profitable. In Q1 2018, the average interest cover ratio was 342%; by Q1 2024, it had dropped to 191%. This ratio indicates how much of a landlord’s mortgage costs are covered by their rental income.
Changing Preferences and Financial Struggles
Most BTL borrowers prefer fixed-rate mortgages, with 90% of new lending in the past two years done on this basis. However, a larger proportion of BTL mortgages remain on variable rates compared to the residential sector, leading to a higher incidence of arrears among BTL mortgage holders. The total number of BTL mortgages in arrears increased by 93% compared to the same quarter last year, although it still represents just 0.68% of all BTL mortgages.
The tax changes from 2016 and 2017 have also driven more BTL landlords to establish themselves within a company structure. Currently, company-held mortgages account for 10% of BTL mortgages, but this trend is expected to grow as landlords seek to mitigate challenges.
At the end of Q1 2024, there were 13,570 BTL mortgages in arrears out of 1.98 million, and 600 BTL possessions were recorded, a 40% increase from the same period last year. However, this number remains below pre-pandemic levels.
Advice and Support for Landlords
James Tatch, head of analytics at UK Finance, highlighted the importance of a resilient private rental sector. “A flexible and well-run private rental sector is an essential part of the housing market. Landlords face a number of challenges, from changing regulations to rising interest rates, but have shown resilience,” he said. He stressed the need for government support for responsible landlords, particularly with the planned abolition of Section 21 ‘no fault’ eviction notices.
Tatch expressed cautious optimism about the future of the BTL sector, noting, “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.”
Lenders are encouraged to offer support to those struggling with mortgage payments. Tatch advised, “If you are struggling, please reach out to your lender as soon as possible to discuss the support options available.”
As landlords navigate these turbulent times, the importance of proactive communication with lenders and staying informed about market changes cannot be overstated. The resilience of the buy-to-let sector will depend on adaptive strategies and continued support from financial institutions.
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