Buy-to-let mortgage market shrinks for first time ever

The buy-to-let mortgage market has shrunk for the first time ever as soaring borrowing costs and higher taxes force landlords to sell up.

Potential property investors are also being put off from becoming buy-to-let landlords.

The volume of lending for buy-to-let house purchases more than halved over the course of 2023, according to the trade body UK Finance.

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The number of new mortgage loans being granted fell from 25,280 in the fourth quarter of 2022 to 12,422 in the first quarter of this year.

Rapidly rising interest rates played a major role in this trend, making it harder for those looking to buy a rental property to pass lenders’ affordability tests.

In terms of outstanding mortgages, the buy-to-let market contracted for the first time, from 2.039 million mortgages in Q1 2023 to 1.98 million in Q1 2024.

Meanwhile, buy-to-let mortgage arrears have rocketed 93% over the past year, with 13,570 home loans in arrears.

The buy-to-let environment is likely to become even more challenging for landlords, with the government confirming in the King’s Speech last week that it would introduce legislation to "give greater rights and protections" to those renting, including "ending no-fault evictions".

Buy-to-let market shows strain 

While talk of squeezed landlords is nothing new, this is the first time UK Finance has recorded an annual decline in the size of the buy-to-let mortgage market. 

Lower mortgage lending indicates landlords exiting the market, and potential investors choosing not to buy rental properties.

A number of factors have been reducing the appeal of being a landlord over the past few years, and denting their profits.

For example, landlords now face extra stamp duty on second and subsequent properties, and you can only get mortgage interest relief at the basic rate of tax. Previously, higher-rate taxpayers received 40% tax relief on mortgage payments.

Higher mortgage rates and reduced capital gains tax are also hitting landlords.

In terms of profitability, despite rents increasing, the rising costs of being a landlord means that it’s not as profitable as it once was. 

In the first three months of 2018, the average interest cover ratio – the amount of a landlord’s mortgage costs covered by their rental income – was 342%. In Q1 2024, it had dropped to 191%.

UK Finance says being a buy-to-let landlord has become “more challenging and less attractive”.

Buy-to-let mortgage choice

The UK Finance report reveals that most buy-to-let borrowers continue to choose fixed-rate mortgages, with 90% of new lending during the past two years being done on a fixed-rate basis. 

However, when compared with the residential sector, a larger proportion of landlord mortgages are on variable rates.

This has contributed to proportionally more buy-to-let mortgage holders falling into arrears.

At the end of 2023, there were 13,570 buy-to-let mortgages in arrears. While this is a 93% increase on the same quarter a year ago, it’s still just 0.68% per cent of all buy-to-let mortgages.

The number also remained flat in Q1 2024.

Most buy-to-let mortgages are interest-only. As such, they’re more affected by higher interest rates.

There were 600 buy-to-let possessions during the first quarter of this year, compared with 430 in the same quarter a year ago. According to UK Finance, this is still below the number before the pandemic.

Landlords are facing much higher mortgage costs compared to a few years ago. The average two-year buy-to-let mortgage rate today is 5.43%, according to the data analyst Moneyfacts, while the average five-year fix is 5.5%. 

If you’re a landlord struggling to meet your mortgage payments, speak to your lender. They have a range of options available to support customers - and contacting them will not impact your credit score.

What next for buy-to-let? 

Landlords may see a seasonal bounce this summer with rents set to rise as the “peak lettings season” begins.

Looking more long term, all eyes will be on the next set of regulations to impact property investors.

James Tatch, head of analytics at UK Finance, comments: “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.

“However, given the new government is committed to abolishing Section 21 'no fault' eviction notices, it must make sure that responsible landlords have other options for when they have legitimate reasons to take their property back.”

He believes that with strong rental demand and strong lending standards, the buy-to-let sector could emerge from last year’s downturn sooner than previously expected, and that further rises in arrears are limited.

Having said that, UK Finance is forecasting a further drop in buy-to-let mortgage lending this year. It thinks lending will fall by a further 13%, to £7 billion.