A recent report from Fitch Ratings, a respected global ratings agency, has shed light on some significant shifts happening within the UK’s Buy-To-Let (BTL) mortgage sector. The crux? BTL mortgage originations – which is the process of introducing new mortgages into the market – have seen a decline.
The Core Reason: Mounting Cost Pressures on Landlords
Two main culprits have been identified:
- Rising Interest Rates: The average mortgage rates have increased substantially, by around 4 percentage points since the first quarter of 2022. This surge means many landlords, especially those with BTL mortgages, are now shouldering heavier costs.
- Difficulty Passing Costs to Tenants: Traditionally, if a landlord experienced increased costs, they might consider passing some of these on to the tenants through higher rents. However, the current market dynamics have reduced this headroom. As a result, properties that yield lower rent have become less attractive, pushing some landlords to sell these assets.
With the convergence of these factors, many landlords are finding it challenging to meet the minimum interest coverage – a ratio lenders look at to determine if the borrower can service their debt – set at 125% by many lenders.
The Result? A Sharp Decline
The tangible result of this affordability crunch is a significant drop in BTL origination volumes, which have fallen by 44.1% year-on-year, amounting to GBP 5.7 billion in the first quarter of 2023.
Landlords’ Response and Market Shifts
Given the financial constraints, a notable number of landlords are choosing to exit the market. Here’s a look at some data:
- Landlord Exits: According to HMRC’s capital gains tax data, there was a sale of 151,000 properties by landlords in the fiscal year 2022-2023. When compared to the 98,000 sales in 2020-2021, this marks a noticeable uptick.
- Conversion of Rentals to Sales: Property portal Zoopla has observed that about 11% of homes listed for sale on its platform in the past three years were former rental properties.
However, this exodus from the BTL sector doesn’t come without consequences.
Impacts on the Rental Market
- Rental Growth: With fewer rental properties available, there’s been a strong rental demand leading to an average rental growth of 7% over the last year. While this might seem like good news for remaining landlords, this growth rate pales in comparison to the rise in their interest costs.
- Loan Arrears: There’s also been an unsettling rise in the number of BTL loans with arrears (unpaid, overdue debt). Specifically, loans with arrears greater than 2.5% of the loan balance saw an increase of about 60% year-on-year in the second quarter of 2023, as per UK Finance’s data. This spike might be an early warning sign of potential instability in the BTL sector.
The Evolving Landscape: Amateur vs. Professional Landlords
One clear trend emerging from these shifts is the manner in which different types of landlords are responding.
Amateur landlords, perhaps daunted by the complexities and financial pressures, are streamlining their portfolios. This might involve selling off low-yield properties or even exiting the BTL sector completely. In contrast, larger-portfolio landlords, equipped with more substantial financial expertise and resources, seem better poised to manage and benefit from higher-yielding properties.
Fitch anticipates that this trend towards ‘professionalisation’ will persist, ushering in an era of fewer landlords who, on average, manage larger property portfolios.
In Conclusion
The UK’s property market, particularly the BTL mortgage sector, is undergoing a transformative phase. Potential and current landlords need to be well-informed and adaptable to navigate these shifting waters successfully.