The buy-to-let (BTL) mortgage market has encountered significant obstacles in recent times, particularly with a notable decline in lending for BTL house purchases. According to UK Finance, the number of new mortgage deals for this purpose has decreased by more than half, from 25,280 in the fourth quarter of 2022 to 12,422 in the first quarter of 2023. This decline has been attributed to rapidly rising interest rates, which have made it increasingly challenging for potential landlords to meet lenders’ affordability criteria.
In addition to the impact of rising interest rates, landlords have also had to contend with the stamp duty surcharge on second and subsequent properties, as well as the gradual reduction of higher-rate income tax relief on mortgage payments for rental properties. These factors have collectively contributed to making the prospect of being a landlord less appealing and more arduous.
The diminishing BTL mortgage market is evident in the decrease of outstanding BTL mortgages from 2.04 million in the first quarter of 2023 to 1.98 million in the first quarter of 2024. It is noteworthy that one third of the BTL market consists of landlords with only one property, while 10% of BTL mortgages are held by landlords who have established themselves as companies.
Despite these challenges, it is noteworthy that the number of BTL mortgages in arrears has remained relatively stable. UK Finance reported that as of the first quarter of 2024, there were 13,570 BTL mortgages in arrears, representing just 0.68% of all BTL mortgages.
In response to the difficulties faced by landlords, mortgage lenders continue to provide tailored support to individuals who may be struggling with their mortgage payments. However, rising costs have placed pressure on landlords’ profits, with the average interest cover ratio – a measure of how much of a landlord’s mortgage costs are covered by their rental income – dropping from 342% in the first quarter of 2018 to 191% in the first quarter of 2024.
Significantly, the BTL mortgage market has witnessed a significant proportion of new lending being conducted on a fixed-rate basis, with 90% of new BTL lending over the past two years falling into this category. However, when compared to the residential sector, a larger proportion of BTL mortgages are on variable rates, resulting in a higher number of BTL mortgage holders falling into arrears.
Looking ahead, James Tatch, head of analytics at UK Finance, expressed optimism about the buy-to-let sector’s prospects, citing strong rental demand and lending standards as potential factors that could contribute to its recovery from the previous year’s downturn. Tatch also emphasized that lenders are committed to providing support to individuals facing financial challenges and encouraged those in need to reach out to their lenders to explore available support options.
In light of the diverse challenges and trends within the BTL mortgage market, it is evident that landlords continue to navigate a complex landscape. By understanding these dynamics and leveraging available support, landlords can position themselves to overcome existing challenges and thrive in the evolving buy-to-let sector.