The volume of lending for buy-to-let (BTL) house purchases more than halved over the course of 2023, according to UK Finance.

The number of new mortgage deals being granted for this purpose dropped from 25,280 in Q4 2022 to 12,422 in Q1 2024.

Rapidly rising interest rates played a major role in this trend, making it harder for those looking to buy a BTL property to pass lenders’ affordability tests.

The number of outstanding BTL mortgages also shrank for the first time, although only slightly, falling from 2.039 million in the first quarter of last year to 1.98 million in the first quarter of this year.

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 BTL landlord more challenging and less attractive.

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 per cent. In Q1 2024 it was 191 per cent.

Most BTL borrowers continue to choose fixed rate mortgages, with 90 per cent of new lending during the past two years being done on a fixed rate basis.

However, when compared with the residential 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 ten per cent 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.

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 cannot use a wider property portfolio to square their higher costs.

At the end of the first quarter of this year, 13,570 of the 1.98 million outstanding BTL mortgages were in arrears.

While this is a 93% increase on the same quarter a year ago, it is still just 0.68% of all BTL mortgages and the number has not increased since the last quarter of last year.

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. While this is a 40 per cent increase, it’s still below the number before the pandemic.

The increases we’re now seeing 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.

Lenders remain on hand to help anyone struggling with their mortgage payments. We would encourage anyone who’s worried to reach out to their lender at the earliest opportunity to discuss the support options available for their circumstances.

Contacting your lender to find out what support’s available will not impact your credit score.

James Tatch, head of analytics at UK Finance, 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.

“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.”

Investors shun buy-to-let as purchases fall to all-time low