UK Finance report examines the market to look at why landlords are falling into arrears
The volume of lending for buy-to-let house purchases dropped significantly in 2023, according to UK Finance, with the number of new loans decreasing from 25,280 in the last quarter of 2022 to 12,422 in the first quarter 2024.
The trade association said rapidly rising interest rates were a major factor, making it harder for prospective BTL buyers to pass lenders’ affordability tests.
UK Finance’s buy-to-let update for Q1 2024 also showed the number of outstanding BTL mortgages also fell slightly for the first time, from 2.04 million in Q1 2022 to 1.98 million in Q1 2023.
It pointed out that the stamp duty surcharge on second and subsequent properties, introduced in 2016, and the phased removal of higher-rate income tax relief on mortgage payments for rental properties have made being a BTL landlord more challenging and less attractive.
Despite increasing rents, the rising costs of being a landlord have reduced profitability. In Q1 2018, the average interest cover ratio, which measures how much of a landlord’s mortgage costs are covered by rental income, was 342%. In Q1 2024, it was 191%.
Meanwhile, most BTL borrowers prefer fixed rate mortgages, with 90% of new lending over the past two years being on a fixed rate basis. However, a larger proportion of BTL mortgages are on variable rates compared to the residential sector. This has resulted in a higher proportion of BTL mortgage holders falling into arrears, although the total number remains low.
The tax changes in 2016 and 2017 have also led to more BTL landlords setting up within a company structure. These mortgages represent just 10% of BTL mortgages, but more landlords are adopting this approach. This trend is expected to continue as challenges persist.
However, UK Finance reported that one in three BTL mortgages are still held by landlords with just one rental property. Most of these landlords are not set up as a company and are more likely to struggle with higher interest rates.
As of Q1 2023, 13,570 of the 1.98 million outstanding BTL mortgages were in arrears, a 93% increase from the same quarter last year. This still represents just 0.68% of all BTL mortgages, and the number has not increased since Q4 2022.
The proportion of BTL mortgages in arrears has risen more than among residential mortgage holders because most BTL mortgages are interest-only and therefore more affected by higher interest rates.
There were 600 BTL possessions in Q1 2023, compared with 430 in the same quarter last year, a 40% increase. However, this is still below pre-pandemic levels. The recent increases are mainly due to the number of possession cases returning to normal levels after the pandemic disruptions.
UK Finance reminded borrowers that lenders remain available to help anyone struggling with mortgage payments and encourage those worried to contact their lender to discuss support options. Reaching out for support will not impact credit scores, it added.
“A flexible and well-run private rental sector is an essential part of the housing market,” said James Tatch (pictured), head of analytics at UK Finance. “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.
“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.”
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