The volume of lending for buy-to-let (BTL) house purchases fell by more than half over the course of 2023, UK Finance has revealed.
As part of its buy-to-let (BTL) update for Q1 2024, alongside its report ‘The Shape of Buy-to-let’, UK Finance examined the market to look at why landlords were falling into arrears.
The number of outstanding BTL mortgages shrank for the first time, although only slightly, falling from 2.039 million in the first quarter of last year to 1.98 million in the first quarter of this year.
The Stamp Duty surcharge on second and subsequent properties, which came into force in 2016, and the progressive removal of higher-rate income tax relief on mortgage payments for rental properties, have also made being a BTL landlord more challenging.
In Q1 2018, the average interest cover ratio (ICR) was 342% while in Q1 2024 it was 191%.
Most BTL borrowers continued 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 BTL mortgages are on variable rates.
This contributed to proportionally more BTL mortgage holders falling into arrears, although the total number of BTL mortgages in arrears remained low.
The tax changes in 2016 and 2017, which contributed to the market slowdown, also led to more BTL landlords setting up within a company structure.
These mortgages represented just 10% of BTL mortgages, but more new and existing landlords are choosing to set up in this way.
One in three BTL mortgages were still held by landlords who own just one rental property, most of whom were not set up as a company.
At the end of the first quarter of this year, 13,570 of the 1.98 million outstanding BTL mortgages were in arrears.
While this was a 93% increase on the same quarter a year ago, was still just 0.68% of all BTL mortgages and the number has not increased since the last quarter of last year.
The proportion of BTL mortgages in arrears rose more than among residential mortgage holders because most BTL mortgages are interest-only and affected by higher interest rates.
There were 600 BTL possessions during the first quarter of this year, compared with 430 in the same quarter a year ago; while this was a 40% increase, it was still below the number before the pandemic.
James Tatch, head of analytics at UK Finance, said: “A flexible and well-run private rental sector (PRS) 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.”
Tatch added: “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 continue to offer a range of support to anyone who’s worried about their finances, with teams of trained experts ready to help.
“If you are struggling, please reach out to your lender as soon as possible to discuss the support options available.”
