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% 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%. In Q1 2024 it was 191%.
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.”
Why the war on landlords is over – and buy-to-let is dead
They are calling it the death of buy-to-let.
Despite rental yields rising to a record high across much of the country, investors are abandoning the sector, with purchases falling to a record low. In the face of higher mortgage rates, uncertainty about landlords’ rights and increasing red tape, estate agents have reported a slump in interest nationwide.
Landlords purchased 10% of homes sold across Britain during the first half of this year, according to research by Hamptons. The estate agency said this figure is the lowest share since its records began in 2010. It is significantly less than the 16pc of homes bought by landlords in 2015.
Purchases by landlords have fallen in every region except the North East since 2015, when the Government first began introducing measures to dampen demand in the sector. The biggest decline has been in London, where the share of homes bought by landlords has more than halved from 17% in 2015 to an all-time low of 8% so far this year. This comes despite rents in London reaching a record high.
Jilly Bland, lettings manager at Robert Holmes, an estate agency in Wimbledon, London, says “there’s been a very definite slump since last October. Since then, month on month, there are either landlords moving back into their properties, coming home from abroad, or selling up. The buy-to-let market has really died, it’s not just falling away, it has died.”
There was a boom in buy-to-let purchases from the early 2000s until 2015, spurred by “dinner party landlords” who bought just one property to rent, often on interest-only mortgages, and helped change the make-up of the housing sector.
In England and Wales, five million households were in private rented accommodation in 2021 – equivalent to one in five – up from 3.9 million in 2011 and 1.9 million in 2001. However, a series of changes have reversed the boom. Here are the key factors that have caused a collapse of the buy-to-let sector.
Rising mortgage rates
The increase in mortgage rates over the past two years has left many landlords struggling to turn a profit, especially as around 80% of buy-to-let mortgages are interest-only.
Landlords with just one home to rent, which make 43% of the total in England, also do not have the benefit of a wide property portfolio to square their costs. The average two-year fixed rate buy-to-let mortgage is currently 5.46%, according to analyst Moneyfacts, up from 2.98% in July 2021.
The average five-year fix is 5.48%, up from 3.28% in 2021. That has caused some landlords’ rental yield – the return on the investment over a year – to fall, especially in areas such as London and the South East.
Stan Shaw, head of the estate agency Mervyn Smith, in Kingston Upon Thames, Surrey, says “at one time buy-to-let might have been up to 25% of all our buyers but they’re only an isolated few now. As soon as interest rates increased, the yield evaporated completely for a lot of landlords. Even though average rents have increased significantly, many landlords selling through us say that when they come out of their current fixed rates, the rental income won’t cover their mortgage payments. If house prices were rising, that might have been palatable, but house prices have been generally flat so far this year.”
Figures from UK Finance, the trade body for banks and lenders, show that in the first quarter of 2018, the average interest cover ratio – which is how much of a landlord’s mortgage costs are covered by their rental income – was 342%. In the first quarter of 2024, it was 191%.
This comes despite yields actually rising in the UK overall for new investors, according to Hamptons. Strong rental growth combined with stagnant property prices meant that the average investor purchasing a new buy-to-let in England and Wales this year achieved a gross yield (before costs and taxes) of 7.3%, a whole percentage point more than in 2015, and up from 7% in 2023.
However, Aneisha Beveridge, head of research at Hamptons, says "high mortgage costs reduce this benefit. It’s just so much harder to make the sums stack up. If you’ve got a 75% loan-to-value mortgage, then it’s really difficult to make money on that when you’re paying a rate of 6% and your yield is 7%. Once you factor in your tax bill and other costs, you’re probably not making money on a monthly basis. So even though rents and yields have risen, it doesn’t work when you’re taking out big mortgages.”
Renters’ Rights
Landlords have expressed concern that they will have less power in the future to evict tenants who are not paying their rent or wrecking a property. A new Renters’ Rights Bill was announced in the King’s Speech last week, with the Government saying it will implement much greater protection for tenants around sudden evictions or rent rises.
A key pledge is to abolish Section 21 evictions, also known as no-fault evictions. A Section 21 gives landlords the right to tell tenants they have two months to move out, and can be issued without court approval and at no cost. If it is ignored, landlords can then turn to the courts.
The idea of removing this right was first proposed by the Conservatives five years ago, but has faced strong criticism from landlords who say that it will leave them without a means to evict problem tenants other than going through the backlogged county courts which can take months to resolve.
Neil France, 67, a private landlord with seven properties in Merseyside and Essex, says "he understands the need for tenants to have more protection around sudden evictions. I don’t think it’s unreasonable to say to a landlord you’ve got to give someone 12 months notice to move out. Landlords need to have some power to deal with problem tenants, we’ve had good and bad tenants and one of the reasons you have Section 21 is when you’ve got a tenant who is ruining your house and is not paying any rent. By removing this, you’re basically taking away something which could help you to get your house back, and you can’t appeal to anybody other than by going to court. So I don’t think the planned changes are very balanced."
Critics of the reforms say that at a time when there is already a severe imbalance between rental demand and properties available, abolishing Section 21 may also cause some landlords to be more more cautious about who they let their properties out to, causing further delays and shortages.
Lack of tax relief
In 2015, the then chancellor George Osborne announced a series of changes designed to dampen demand in the buy-to-let sector, after deciding that landlords were snapping up properties that should be left for first-time buyers. The Government began a four-year tapering of the tax relief that landlords could claim on their mortgage interest costs from 2017 onwards.
Before then, landlords only needed to pay income tax on the profits they made from their properties, having first deducted 100% of their mortgage interest and other associated costs such as arrangement fees. As most buy-to-let landlords were on interest-only mortgages, this meant they could claim their entire mortgage payment.
However, by 2021, landlords had to pay tax on their total income, which includes all rent, before claiming a basic tax reduction of 20%.
This has drastically changed the economics of owning a property for many landlords and was a particularly worse deal for higher and additional-rate taxpayers, who risk paying tax even when they make a loss on their rental properties. The Government also brought in a 3pc stamp duty surcharge on second homes and buy-to-let purchases from 2016 onwards.
Meera Chindooroy, deputy director of campaigns, public affairs and policy at the National Residential Landlords Association, says “over recent years, the impact of the loss of mortgage interest relief has had a big impact on landlords. Landlords who were completing their tax returns in 2021-22, would have seen the full impact of that change, just as interest rates were also getting much higher. So the two together have meant that it has become quite a lot more expensive to be a buy to let landlords specifically."
Some landlords have instead bought properties as a limited company, which only pay corporation tax on profits. Mortgage interest payments are also tax deductible for a company.
Hamptons said a record 50,000 landlords set up buy-to-let companies in 2023, but the overall proportion is still small. UK Finance says only 10% of buy-to-let mortgages are held by landlords who have set up as companies. Since 2016, landlords have been selling more properties than they are buying in Britain, according to Hamptons. Private landlords accounted for 16pc of all sellers in 2022, the first year in which the mortgage interest tax relief was fully removed.
Hamptons estimates that a further 146,060 homes will be sold by private landlords across Britain this year, offsetting the 113,630 new buy-to-let purchases in 2024 and will likely mean that private landlords will have sold 328,750 more rental homes than they’ve bought since 2016.
The new Labour government has also refused to rule out raising capital gains tax, which will eat into the profit landlords could make from selling their home. Capital gains tax protections have already been slashed under the Conservatives, standing at just £3,000 a year today – down from £12,300 a matter of years ago.
Increasing red tape and regulations
Landlords say the amount of paperwork and regulatory hurdles they must get through to rent a property has also affected their desire to remain in the sector. There are over 170 pieces of legislation that landlords need to adhere to, with local authorities responsible for enforcing most of these regulations.
France says “when I’m renting a property now I’ve got about ten pieces of information that I’ve got to send to a tenant, from GDPR, to risk assessment for fire, to more regulations around mould, as well as the tenancy agreements and the EPC certificate, electrical certificate and the gas certificate. It’s just a plethora of stuff that you have to send out to people now. This year the Government introduced new “right to rent” immigration regulations, that require landlords to get a “share code” – a nine-digit code generated by the Home Office – for those who are not British or Irish citizens, rather than just checking their passport and an employment reference."
In 2020, new rules also came into force in England requiring landlords to get an electrical safety inspection of their rented property and provide tenants with the report, or else could be fined up to £30,000.
Bland says:“the costs are just sometimes not viable. In Wimbledon, we have many old properties, some of them are period or listed buildings, and it sometimes costs tens of thousands of pounds to upgrade them, and get new circuit boards and low energy lighting.”
Landlords also expect Labour to bring back the Conservatives’ abandoned plan to make all rented properties have an energy efficiency rating of C or above by 2030, up from the current minimum E rating.
Such a rule would require many landlords to invest in smart meters, new lighting, extra insulation, double glazing and a-rated energy efficient boilers to reach the minimum standards. The mortgage broker Habito estimated that it would cost around £6,000 on average to bring a property from an E to a C rating.
Richard Donnell, research director at property site Zoopla, says “the next big thing on the horizon that’s really going to lead to another round of selling up from landlords is minimum energy standards for rented housing in 2030.”