The lenders’ trade body, UK Finance, has published a report examining why some landlords are falling into mortgage arrears and why the sector generally is so much less profitable than before.
It shows that the volume of lending for BTL property purchases more than halved over the course of 2023, with the number of new mortgage loans being granted falling from 25,280 in Q4 2022 to 12,422 in Q1 2024.
The BTL mortgage market shrank for the first time, from 2.039m outstanding BTL mortgages in Q1 2023 to 1.98m in Q1 2024.
While landlords with just one property, most of whom aren’t set up as a company, make up one third of the BTL market, 10% of BTL mortgages are now held by landlords who have set up as companies.
At the end of 2023, there were 13,570 BTL 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 BTL mortgages and the number hasn’t increased since the last quarter of last year.
Despite rents increasing, the rising costs of being a landlord means that it’s not as profitable as it once was. In Q1 2018, the average interest cover ratio – that’s how much of a landlord’s mortgage costs are covered by their rental income – was 342 per cent. In Q1 2024 it was 191 per cent.
Most BTL 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 owner-occupied sector, a larger proportion of BTL mortgages are on variable rates.
This has contributed to proportionally more BTL mortgage holders falling into arrears, although the total number of BTL mortgages in arrears remain low.
The tax changes in 2016 and 2017, which have contributed to the market slowdown, have also led to more BTL landlords setting up within a company structure.
These mortgages still represent just 10% of BTL mortgages, but more and more new and existing landlords are choosing to set up in this way. As the challenges facing BTL landlords remain, this trend is likely to continue says UK Finance.
However, one in three BTL mortgages are still held by landlords who own just one rental property. Most of these landlords are also not set up as a company.
These landlords have been much more likely to struggle with higher interest rates because they can’t use a wider property portfolio to square their higher costs.
The proportion of BTL mortgages in arrears has risen more than among residential mortgage holders because most BTL mortgages are interest-only. As such, they’re more affected by higher interest rates.
There were also 600 BTL possessions during the first quarter of this year, compared with 430 in the same quarter a year ago. This is a 40% increase but it’s still below the number before the pandemic.
The increases seen now are mainly due to the number or possessions cases being seen by the courts returning to normal levels, following the disruption of the pandemic years.
James Tatch, head of analytics at UK Finance, says: “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 eviction notices, it must make sure that responsible landlords have other options for when they have legitimate reasons to take their property back.
“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.”
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