BTL lending slumps amid rising costs for landlords

The UK’s buy to let market is experiencing a significant slowdown, with a sharp decline in new lending and increasing financial pressures on landlords, according to the latest quarterly data.

UK Finance has revealed that the value of new BTL mortgages in Q4 2023 plunged by 55.4% compared to the same period in 2022, reaching just £6.3 billion.

This substantial drop reflects the current financial difficulties for property investors, the organisation says.

Landlords are facing higher borrowing costs

Adding to the challenges, landlords are facing higher borrowing costs with the average interest rate for new BTL climbing to 5.7%, a significant increase from 3.67% a year earlier.

Landlords also saw gross rental yields edging up to 6.74%, compared to 5.85% in Q4 2022, suggesting some growth in rental income.

But this wasn’t enough to fully offset the rising costs and the buy to let interest cover ratio (ICR) fell from 238% to 180%, revealing tighter margins for landlords.

Landlords are also impacted by cost-of-living pressure

Ermir Selmani, an analyst at UK Finance, said: “When considering housing affordability, it is often forgotten that landlords are also impacted by cost-of-living pressures, and most acutely from higher interest rates.

“For BTL landlords, rent increases have not translated into higher profit margins.

“Our data shows that the average Interest Cover Ratio has fallen by 58 percentage points year on year, and now stands at 180%.”

He added: “Despite the current challenges facing the sector, rental demand remains strong, and most landlords are showing resilience.”

Worrying rise in mortgage arrears

The UK’s buy to let sector is also grappling with a worrying rise in mortgage arrears as the number of mortgages in arrears exceeding 2.5% of the outstanding balance rose by 123.9%, reaching 13,570.

Also, BTL repossessions rocketed by 56.3% to 500 in the same period.

The report found a contrasting trend in fixed-rate and variable-rate BTL mortgages with fixed-rate products seeing a modest increase of 1.7% to 1.37 million.

The number of outstanding variable-rate loans fell by 12.7% to 0.62 million.