According to data from UK Finance, BTL lending has significantly decreased, down 56.7% for purchases and 51.6% for remortgages. What’s more, a surprising one in ten properties currently on sale were previously rented, as per Zoopla. This indicates not just a slowdown in new landlords entering the market, but also a mass exodus of existing ones. And, with many landlords waiting for their favourable fixed-rate deals to end—many of which will conclude in 2024—the market could see increased turbulence. In MortgageSolutions, Peter Stimson gave his view of the current situation.

Decoding the Shift

So, how did we arrive here? For the most part, the previous decade was promising for landlords. With cheap finance and rising house prices, many saw substantial returns on their investments, particularly if they had quality properties in prime locations. However, some landlords were late to this profitable gathering, missing out on the peak benefits.

From 2010 to 2021, BTL surged due to affordable interest rates, hovering just over 2%. Nevertheless, there was a noticeable downturn starting in 2017 when tax reliefs for mortgage payments began to phase out. This move, though harsh for landlords, was cushioned by the still-friendly interest rates. Many new landlords even found ways to navigate this, such as incorporating their properties to benefit from reduced corporation tax.

Despite these challenges, BTL origination reached a peak of £18.2 billion in 2021. Yet, 2023 projections anticipate a significant drop, with originations expected to settle at just above £8 billion, marking a drastic decline.

The Pressures on the Buy-to-Let Market

Most landlords traditionally opt for a ‘buy-and-hold’ strategy, focusing on the potential combination of rental yield and long-term capital appreciation. However, the rapid escalation in interest rates has raised questions about this approach’s viability. Higher interest rates strain potential buyers’ affordability, pushing house prices downward.

Moreover, the average income-to-loan size multiple has increased over the past decade, indicating that without low-interest rates, the house price outlook seems bleak.

But the real pressure point? The interest rates themselves. The majority of BTL mortgages are interest-only, meaning a surge from 2% to 6% in rates can triple monthly payments. With landlords unable to pass on these hikes to tenants, many find themselves in a financial bind. Additionally, lenders are facing challenges, with increased demands on Interest Coverage Ratios (ICRs) and reduced loan-to-value (LTV) ratios, making it harder for landlords to secure favourable terms or even refinance existing mortgages.

A Glimpse into the Future

Given the current challenges, one might assume the BTL market’s future is grim. However, every cloud has a silver lining. The BTL process is evolving from a casual investment option to a more professional and calculated business choice. As smaller landlords leave, the market is poised to become more structured and professional.

Though interest rates are currently high, a reduction to around 4.5% could rejuvenate the BTL sector, making it viable once more for amateur landlords. While this may not be immediate, the market’s revival is on the horizon. In the meantime, smaller landlords might continue their exodus, but for those who persevere, the future holds promise.