The interplay between economic factors and regulatory change continues to impact on market activity, and it’s timely that we’re able to release our first quarterly BTL update to draw out some key trends.

Since the country emerged from the Global Financial Crisis more than a decade ago the quality of BTL lending has remained strong, further bolstered in 2017 by formalised underwriting standards set out by the Prudential Regulatory Authority (PRA). However, the more challenging market conditions, and in particular the current higher interest rate environment, have significantly impacted on the BTL market.

Interest rates play a pivotal role in property investment, directly impacting borrowing capacity and landlords’ return on investment. With higher rates reducing profitability, we have seen weaker demand for new BTL loans for house purchase, starkly reflected in the value of new BTL house purchases falling 56 per cent in Q4 2023 compared with the final quarter of 2022. At £1.8 billion this was, excluding the housing market shutdown during the early pandemic months, the lowest level of activity since 2013. BTL remortgages followed a similar pattern, with a 55 per cent year-on-year fall in the final quarter of 2023 to £4.3 billion.

According to official statistics, rents increased significantly in Q4 2023. The annual rate of rental growth for the UK overall was 6.2 per cent, but there was significant variation across regional rental markets. In London rental growth was 6.8 per cent, and 7.1 per cent in Wales. And, although Northern Ireland data are less timely, the latest data point indicates rents were rising at a little under ten per cent in Q3 of 2023

The Chancellor’s recent announcement that Local Housing Allowance (LHA) will be increased from April is therefore welcome news for landlords and tenants alike, ensuring that some of the most financially vulnerable households in the PRS are supported – but this doesn’t go far enough. LHA should be indexed to track rents annually to ensure it remains fit for purpose. Longer term, the supply of new homes should be a central consideration for any policy interventions into the PRS, especially if these concern rent controls or similar measures.

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 (defined as rental income expressed as a proportion of mortgage interest payments) has fallen by 58 percentage points year on year, and now stands at 180 per cent.

As in the wider mortgage market, the higher interest rate environment has also had an impact on some landlords’ ability to maintain their mortgage payments. As most landlords have interest-only mortgages, rate increases impact more significantly on the BTL sector than the residential market, whereas the vast majority of customers’ mortgages are on a capital repayment basis. Furthermore, as landlords rely on rental income to pay their mortgage, it is not usually possible to immediately increase rents each time mortgage payments rise and landlords are not always willing or able to raise rents to fully cover those increased costs, particularly where their tenants are also experiencing the same cost of living pressures.

The number of BTL mortgages in arrears greater than 2.5 per cent of the outstanding balance, reached 13,570 in Q4 2023, up 124 per cent on the same quarter a year earlier. Although clearly a significant increase, it is important to put this in context, just 0.68 per cent of all BTL mortgages are in arrears – this is lower than in the residential sector, as it has been for many years. BTL mortgage possessions followed a similar trend, increasing by 56 per cent year on year, though these levels of possessions remain low by historic comparisons.

Mortgage lenders remain prepared to support landlords struggling with mortgage payments - offering forbearance tailored to the individual landlord’s circumstances. It is therefore vital that landlords reach out to their lender as soon as possible if concerned about their payments.  

Despite the current challenges facing the sector, rental demand remains strong, and most landlords are showing resilience. Proposed changes to the possession process, alongside other reforms to support tenants, could see the PRS in England become the tenure of choice for more households, with regulations that reflect the broader demographics of its residents. However, these changes (as well as those proposed in Scotland and Wales) must be fairly balanced to ensure that a new generation of professionalised landlords, alongside existing providers of rental property, can continue to thrive.