The number of landlords falling behind on mortgage payments has risen by a third over the summer amid a streak of interest rate hikes, new figures have shown.
According to figures produced by trade association, UK Finance, 8,980 buy-to-let mortgages had arrears that totalled over 2.5% of the outstanding balance as of June 2023 - a rise of 28% in comparison with the end of March. Almost half of landlords saw arrears rising to over 5%. If the trend continues, there are fears fewer homes would be available to rent, pushing up charges for tenants o have already seen prices jump.
Figures have also shown that the average for a buy-to-let mortgage rate in June was 5.45% before rising to 6.18% in July.
Kate Steere, a mortgages expert at finder.com, said "we’re seeing a trend of landlords pulling out of the buy-to-let market as consecutive base rate hikes have made it unprofitable for them to continue. This will have a worrying impact on an already competitive rental market, leaving renters with fewer options and rising costs as they attempt to navigate the cost-of-living crisis.”
Although mortgage arrears for landlords have increased, monthly costs for renters have risen by 5.3% on average in the year to July the latest figures have shown. In London specifically, rents have increased 5.5 per cent in the year leading to last month - the sharpest increase in rents since comparable records began for London in 2006.
Ben Twomey, Chief Executive of Generation Rent told the Standard “renters are between a rock and a hard place; stay where they are and face a rent hike or move out and try to find somewhere cheaper which might take them miles away from their family, friends and work. The increase in mortgage interest rates shouldn’t be causing pain for so many renters. According to our recent survey, only 12% of landlords are saying the rise in mortgage interest rates is the reason they are putting the rent up. Only a minority of landlords have faced an increase in mortgage interest rates, while the majority of tenants have faced a rent rise over the last year. Is it right that the government has given mortgage-holders protection from repossessions, but where is the same support for renters?”
On August 3, the Bank of England raised interest rates by 0.25% to 5.25, the 14th successive hike.
Following the hikes, according to Moneyfacts, the average two-year fixed residential mortgage rate is now 6.77%, while the average five-year fixed residential mortgage rate is 6.26%.
Number of BTL landlord repossessions jumps
Growing numbers of landlords are struggling to pay their mortgages and are having their rental homes repossessed, official figures reveal. According to UK Finance, there were 440 buy to let landlords who had properties repossessed in the second quarter of 2023 – that’s up 7% from the first quarter.
The number of BTL mortgages in arrears has rocketed by 28% in the same period – but that is 59% higher than in 2022. With rising mortgage rates, there are now 8,980 landlords – double last year’s figure – in arrears.
Of those, 4,810 landlords have arrears that are between 2.5% and 5% of their mortgage balance, up 126% from last year. There are 2,300 landlords who are in arrears of between 5% and 10%. That is up by a third.
There are nearly 2,000 BTL landlords who are in arrears of more than 10%, a rise of 4%.
A worrying sign for the rental market
Interactive Investor’s senior personal finance analyst, Myron Jobson, said “the uptick in buy-to-let arrears is a worrying sign for the rental market. With mortgage rates creeping higher in the current quarter, the worry is there will be a new wave of landlords facing financial strain in the near future when they remortgage. For many landlords, the uptick in mortgage costs is the final straw after years of being squeezed by higher taxes. Landlords who are struggling financially due to mortgage arrears might try to offset their financial quagmire by raising the rent for their tenants.”
81,900 homeowners are in mortgage arrears
UK Finance also reveals that 81,900 homeowners are in mortgage arrears of 2.5% or more of their outstanding balance.
There has been a 12% increase in those in arrears of between 2.5% and 5%, that’s up 12%, and there’s a 12% rise, or 30,940 homeowners in arrears of between 5% and 10%. Just this week, RICS warned that higher mortgage rates are having an effect on the UK’s housing market with increasing rents and sales plummeting.
House prices are also in decline, Halifax said this week, and growing numbers of home sellers are having to cut their asking price.
Homeowner and buy-to-let possessions
A UK Finance spokesperson said “the number of homeowner and buy-to-let possessions in (the second quarter) remain close to historic lows but are expected to continue to rise in line with our mortgage market forecast given the ongoing cost-of-living challenges. It’s important for homeowners and landlords to remember that there is support available to anyone struggling with their finances. If you think you might have difficulty making your mortgage payments, reach out to your lender early to find out the options available.”
War on landlords pushes record numbers to sell up
A record proportion of landlords plan to sell off properties this year in the face of growing taxes and regulations. Landlords are already selling rental properties and are now twice as likely to sell property than they are to buy, according to a survey for the National Residential Landlords Association, a trade body.
More than one in 10 (12%) of landlords have sold properties in the three months to June, but only 5% made new purchases, it said. One in three landlords (37%) said they were planning to reduce the number of properties they let in the coming year – the highest proportion on record. Just 85 said they planned to increase the size of their portfolios.
Experts say it is exacerbating an already spiralling rental crisis.
Ben Beadle, chief executive of the National Residential Landlords Association, said “the Government must reverse its damaging tax hikes on the sector. It is frankly absurd to have a tax system that punishes landlords for providing the homes tenants so desperately need whilst favouring holiday lets.”
He said a supply crisis in the rental sector would worsen if the Government did not take action.
National rents rose by 5.3% in the year to July – the highest rate since 2016, according to the Office for National Statistics. In London, where mortgages are the most expensive, rents rose by 5.5%, which was the highest rate since records began in 2006. The biggest surge was in Wales, where tenants are paying 6.5% more than a year ago.
Landlords face growing mortgage costs, but the Government has cut tax relief, squeezing profits.
Buy-to-let investors used to be able to claim full tax relief on mortgage interest payments but this has been restricted since 2020 for those who own properties in their own name. This comes on top of the 3pc stamp duty surcharge on additional properties introduced in 2016. Proposed reforms for the rental sector were also said to be adding to their anxieties.
Landlords face the prospect of having to upgrade their rental properties to an energy performance rating of C by 2028 under Government proposals, at a cost of up to £10,000.
Plea to keep landlords in the PRS
The government needs to act fast to prevent a housing disaster, with more people renting than ever before and fewer landlords willing to invest in rental properties, one expert says. Neil Cobbold, the managing director of automated rental payment firm PayProp UK, points to an analysis of HMRC data by accountancy firm UHY Hacker Young.
It reveals that the private rented sector (PRS) lost 116,000 properties and 70,000 landlords in 2022. Zoopla also reports that 11% of homes for sale in the UK were previously rented out.
Sector can bounce back and become stronger
Neil says the sector can bounce back and become stronger than ever – as long as the right incentives are in place.
He explains “the private rented sector has been under the government spotlight in recent years and there is no doubt that this may have contributed to some landlords leaving the industry. While we welcome measures to improve the quality of housing in the PRS and strengthen tenant rights, we also believe that more could be done to both incentivise landlords to remain in the sector and to attract new investors. It has been widely discussed within the industry that the reversal of Section 24 may be such an incentive for landlords to remain even with more regulation. Being allowed to deduct mortgage payments from rental income before tax would make a huge difference to landlords’ bottom lines.”
Landlords are finding life harder
Along with rising interest rates, tax changes and regulatory reforms, landlords are finding life harder – and less profitable.
Meanwhile, many potential first-time buyers have been priced out of the market by higher mortgage rates and stricter affordability criteria, increasing the demand for rental homes. This imbalance has led to record-high rents across the country, putting more pressure on tenants and landlords alike.
The PRS currently houses five million households, or 19% of all households in the UK.
Government measures criticised by landlords
Neil warns “other government measures criticised by landlords are the proposed changes to the Minimum Energy Efficiency Standards (MEES) regulations. By law, all residential rental property must have an Energy Performance Certificate (EPC) rating of at least an ‘E’. The government has recently proposed that this be stepped up further to a ‘C’ or above by December 2028. The measures required to achieve this new standard could prove to be too expensive for some landlords.”
Attractive option for both landlords and tenants
Neil says the government has a responsibility to ensure that the PRS is a viable and attractive option for both landlords and tenants. As such, it needs to find ways to encourage more investment in the sector, while also protecting the rights and interests of renters.
Among the measures the government could and should consider, Neil says, include:
- Offering tax incentives or subsidies for landlords who provide long-term tenancies or improve the energy efficiency of their properties
- Simplifying the regulatory framework and reducing the administrative burden for landlords who comply with the rules and standards
- Providing more support and guidance for landlords who want to join professional associations or accreditation schemes
- Creating a national register of landlords and agents, with clear criteria for entry and exit, and a system of penalties for non-compliance or misconduct.
- He also says that alternative models of renting, such as co-living, build-to-rent or community-led housing, that can offer more choice and flexibility for tenants and landlords should be promoted.
Offering financial support to landlords
He continues “the UK has some of the oldest housing stock in Europe and the industry believes that the government should give some thought to offering financial support to landlords who might struggle to make the sometimes significant investment required. Extensive insulation work and the installation of new heating systems can be prohibitively expensive – especially in those parts of the country where rents are lower, and it would take far longer for landlords to see a return.”
The other factor which has hit the PRS is the lack of available housing stock – especially in places where demand is high, like the major cities.
Neil said “while house prices are falling, mortgage interest rates remain high, so first-time buyers are having to wait longer to afford them. Some workers may never be able to afford to buy their own home, and some of those who could still value the flexibility of renting. The demand for high-quality rentals is always going to be there and the government has got to find a way to attract investors who are interested in being the landlords of tomorrow. The country desperately needs more, newer, greener homes in the PRS – especially in areas of high population where demand has gone through the roof.”
Why the second home crackdown won’t improve the UK’s property market
Properties in holiday hot spots are already £100,000 out of reach for first-time buyers, casting doubt on whether a raid on second home owners will allow locals to buy. Across 15 locations, from Pembrokeshire to Cornwall, the average purchase price of a second home is £343,253. This is £99,482 more than what first-time buyers in these areas are paying, according to analysis from Hamptons Estate agents.
This is in spite of councils and the Government arguing that freeing up second homes will supply more affordable homes to the UK’s property market. It comes as one in four English councils are planning to use new powers to increase the amount of council tax paid by second homeowners, in a move that will see bills rise by hundreds – if not thousands – of pounds.
The new rules will broaden the definition of an “empty home”, and shorten the time a property can be empty before a council tax premium of up to 100% can be charged.
Back in April, levelling up secretary Michael Gove announced a sweep of changes set to make it harder for second homeowners and holiday let owners to hold onto their properties. Mr Gove said at the time that "local people were being “pushed out of cherished towns, cities and villages by huge numbers of short-term lets”.
The Surrey Heath MP said “I’m determined that we ensure more people have access to local homes at affordable prices, and that we prioritise families desperate to rent or buy a home of their own close to where they work.”
Despite these efforts, David Fell, a senior analyst at Hamptons, said “in most cases, these aren’t homes that a first-time buyer would purchase. Sales, where they do happen, tend to be to upsizing families from well outside the local area. Second homes don’t tend to change hands often. Usually there’s a family connection to both the property and the area, with many homes inherited or gifted rather than purchased and when they cease to be second homes, a family member or relative will live in it rather than it being sold.”
Following double-digit house price growth during the pandemic, sales of second homes have collapsed. In Cornwall, they have fallen as a share of overall sales from 14% in 2020 to 9% today.
Less people are buying second homes, too. Compared to 2009, when second homes made up 2.2% of UK house sales, this year to date they have made up 1.5%. Mr Fell said "would-be second-home buyers are feeling the squeeze much like landlords, in the form of higher mortgage rates – making purchases unviable – and the 3% stamp duty surcharge. On top of this has been the gradual addition of council tax premiums on second homes in many of the hotspots, doubling or tripling council tax bills. Taken together, the cost of second home ownership has increased substantially, pushing it beyond the means of a growing number of middle-class households.”
Mark Proctor, regional partner for the south west at Knight Frank, said the "increased cost of borrowing is proving to be a more significant issue for second home sales than either changes in government policy or “a mooted increase” in council tax rates. Second homes are an asset that are a ‘nice to have’ rather than an essential purchase, and traditionally this part of the market feels the pinch first when things get tougher.”
MPs in second home hotspots have also spoken out on the issue. In Parliament last month, Selaine Saxby – MP for North Devon – said her constituency has “nothing like the number of affordable homes” it needs, and that the Government cannot allow coastal communities “to become ghost towns for much of the year”.