Buy-to-let market has considerably contracted

New buy-to-let lending has more than halved in the space of five quarters, suggesting higher interest rates have firmly put the breaks on the market.

In the first quarter of 2024 there were 12,422 new mortgage loans granted for buy-to-let, down from 25,280 in the fourth quarter of 2022.

James Tatch, head of analytics at UK Finance, which conducted the research, said:

“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.”

The buy-to-let mortgage market also shrank for the first time, from 2.039 million outstanding buy-to-let mortgages in Q1 2023 to 1.98 million in Q1 2024.

Some 90% of new buy-to-let lending is now being done on a fixed rate basis, suggesting landlords are feeling cautious about the state of mortgage interest rates in the years ahead.

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.”

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 buy-to-let landlord more challenging and less attractive.

Some 10% of mortgages are now held by landlords via limited companies, a direct result of the removal of income tax relief.

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%. In Q1 2024 it was 191%.

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