UK Buy-To-Let Funding Through Mortgages Has Taken A Downturn

by | Friday 5th Apr 2024 | Mortgage News

Buy-To-Let Funding In The UK Has Taken A Downturn

Buy-To-Let Funding In The UK Has Taken A Downturn

The latest quarterly report from UK Finance sheds light on the challenging landscape of the buy-to-let (BTL) mortgage market in the final quarter of 2023. Revealing a notable downturn in new lending and heightened financial pressures on landlords, the report highlights the intricate competition between economic factors and regulatory changes to buy-to-let property ownership that is impacting thousands of landlords in the UK. In this blog, we will go through some of the findings in the recent report and explain some of the reasons why buy-to-let funding in the UK has seemingly taken such a downturn.

Key Findings On UK Buy-To-Let Funding

The first significant figure mentioned in the report is a substantial 55.4% decrease in the value of new buy-to-let lending, plummeting to £6.3 billion compared to the corresponding period last year. This means that less people are getting mortgages on buy-to-let properties, whether that means new purchases or remortgages. This decline mirrors the broader economic challenges confronting property investors in the UK as the cost of borrowing increases and for many, their properties now longer wash their own faces and owning mortgaged buy-to-lets doesn’t make sense financially.

As mentioned, one significant factor contributing to this downturn in new buy-to-let lending is the surge in average interest rates for new buy-to-let loans, escalating to 5.7% from 3.67% year-on-year. This surge in interest rates amplifies the cost of borrowing for landlords, potentially increasing financial strains in an already challenging environment. Let’s look at an example of how this could look for an average buy-to-let owner with a mortgage.

Buy-To-Let Funding Mortgage Interest Increase

Property Value: £250,000
Mortgage balance: £125,000 interest-only
Mortgage Term: 20 years

Original Rate: 3.67%
Original Monthly Payment: £382

New Rate: 5.7%
New Monthly Payment: £594

Average Gross Rental Yield Has Increased

Despite these difficulties, there is a slight uptick in the average gross rental yield, climbing to 6.74% in Q4 2023 from 5.85% in the same period of the previous year. This suggests a growth in rental income, providing a semblance of resilience against escalating costs. In reality, this just means that landlords are having to increase their rent to keep up with spiralling mortgage costs and the cost of owning rental properties. First-time buyers are buying homes later and later in life, so the demand for rental properties is still very high too, so competition for rental property is high. However, according to the report, the interest cover ratio (ICR) for buy-to-let properties witnessed a sharp decline to 180% from 238% in the preceding year, indicating tighter margins for covering interest payments from rental income when securing a new mortgage.

Buy-To-Let Mortgage Arrears Have Increased

The final bombshell dropped by the report shows that the buy-to-let sector has witnessed a substantial rise in mortgage arrears, with 13,570 mortgages in arrears exceeding 2.5% of the outstanding balance, marking a staggering 123.9% increase from Q4 2022. Additionally, mortgage possessions in the buy-to-let sector surge by 56.3% to 500 during the same period.

Impact Of Economic Factors

The challenging and quite volatile UK economic landscape, combined with a higher interest rate environment, significantly impacts the buy-to-let market. That is clear to see. Higher interest rates directly impede borrowing capacity and landlords’ return on investment, leading to weakened demand for new BTL loans for house purchase. Even when landlords to secure a mortgage and increase rent, the profit margins are still shrinking and in many cases owning a btl property is not financially viable.

Positive Rental Growth Amid Challenges

However, amid these challenges, there is a silver lining in the form of significant rental growth in Q4 2023. Official statistics indicate a robust annual rental growth rate of 6.2% for the UK overall, with substantial regional disparities. Despite the challenges, most landlords are showing incredible resilience. Mortgage brokers such as ourselves at Oportfolio are prepared to extend support to landlords facing difficulties, offering tailored mortgage advice and guidance to mitigate financial strains.

Speak To A Buy-To-Let Mortgage Advisor

The buy-to-let mortgage market in the UK has been faced with significant challenges in recent months and years, characterised by a significant downturn in new lending and escalating financial pressures on landlords. As economic factors and regulatory changes continue to shape the market, it is important that if you have a buy-to-let mortgage, you need to make sure that it works for both you and your tenants. Don’t go it alone when it comes to buy-to-let mortgages. Call our team of mortgage experts today to see how we can help.

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If you have any questions about UK mortgage news or or anything you’ve read then please get in touch. We’d love to hear from you.

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