Significant Drop in New UK Buy-to-Let Mortgages: Sector Experiences First Contraction in Decades

The UK buy-to-let mortgage market has experienced a sharp decline, with the number of new mortgages granted by lenders more than halving in just over a year. This marks the first contraction in the sector since its inception in 1996.

Market Dynamics and Financial Pressures

Recent data from UK Finance highlights the substantial impact of rising mortgage costs and the broader cost of living pressures on landlords. These financial challenges have led many landlords to sell their properties, reducing the overall number of rental properties in the market.

Changing Investment Landscape

The sector has also been affected by recent tax changes, which have made buy-to-let investments less lucrative. As a result, potential new landlords have been discouraged from entering the market, while existing landlords are reassessing their investments.

UK Finance pointed out that landlords with only one rental property are particularly affected by higher interest rates. According to the organisation’s figures, new buy-to-let mortgages fell from 25,280 in the last quarter of 2022 to 12,422 in the first quarter of 2024.

Impact of Rising Interest Rates

UK Finance attributed this trend to rapidly increasing interest rates, which have made it more difficult for prospective buy-to-let buyers to meet lenders’ affordability criteria. The sector, which had been growing for nearly three decades since the introduction of buy-to-let products, has now seen a slight decline, with the number of outstanding mortgages dropping from 2.039 million in early 2022 to 1.98 million in the same period of 2023.

The original surge in buy-to-let investments was driven by legal changes to tenancies in the 1990s and a favourable tax regime. This led to rapid growth in the sector until 2015 when then-Chancellor George Osborne reduced tax relief for property investors and removed a key landlord tax break.

Current Challenges and Future Outlook

Despite strong house price growth and increasing demand for rental properties boosting the sector for several years, a series of mortgage rate rises starting in 2022 has significantly slowed its momentum. UK Finance stated that these developments have made the role of a buy-to-let landlord “more challenging and less attractive.” Even though rental prices have increased, the rising costs associated with being a landlord have diminished profitability.

The number of buy-to-let landlords falling behind on their mortgage payments has also surged. By the end of the first quarter of this year, 13,570 of the 1.98 million outstanding mortgages were in arrears, representing a 93% increase compared to the same period the previous year. However, UK Finance noted that this still accounts for only 0.68% of all buy-to-let mortgages, and the number has not increased since the final quarter of 2023.

This significant shift in the buy-to-let mortgage market underscores the challenges facing landlords today, as financial pressures and regulatory changes reshape the landscape.