In the News
Landlords in Limbo: Buy-to-Let Mortgage Crunch
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23rd July 2024
f you’re keeping an eye on the UK housing market, you might have noticed something peculiar happening: buy-to-let (BTL) mortgages are in a bit of a slump. The number of new BTL mortgages granted has plummeted by over half in just over a year, and for the first time in nearly three decades, the value of the BTL sector has shrunk. This is covered here by the Guardian. Let’s dive into the economics of what’s going on and why it matters.
The Great Mortgage Drop
First things first, why have new BTL mortgages dropped so drastically? The answer lies in the rising cost of borrowing. Interest rates have been climbing steadily, making it harder for potential landlords to get through the stringent affordability tests set by lenders. In fact, the number of new BTL mortgages granted fell from 25,280 at the end of 2022 to just 12,422 in the first quarter of 2024. That's a huge drop!
A Shrinking Sector
For nearly 30 years, the UK BTL market had been on the up and up since its inception in 1996. But now, the number of outstanding BTL mortgages has decreased from 2.039 million in the first quarter of last year to 1.98 million in the same period this year. What’s causing this shift? Higher mortgage costs are certainly a big factor, but there's more to the story.
Taxing Times for Landlords
Back in the 1990s, landlords enjoyed a favorable tax regime. But things took a turn in 2015 when then-Chancellor George Osborne reduced tax relief for property investors and removed a key tax break. This, coupled with a stamp duty surcharge introduced in 2016, has made the BTL market less appealing. Despite rising rents, the increasing costs of being a landlord mean it’s not as profitable as it once was.
The Interest Rate Rollercoaster
Most new BTL mortgages are fixed-rate, with 90% of new lending in the past two years done on a fixed-rate basis. However, a significant number of existing BTL mortgages are on variable rates, which are more vulnerable to rising interest rates. This has led to a higher proportion of BTL mortgage holders falling into arrears compared to those with residential mortgages. At the end of the first quarter of this year, 13,570 of the 1.98 million outstanding BTL mortgages were in arrears, a 93% increase from the previous year.
The Profitability Puzzle
Even though rents have been increasing, the profitability of being a landlord has taken a hit. In 2018, the average interest cover ratio (the proportion of rental income covering mortgage costs) was 342%. By the first quarter of 2024, this had dropped to 191%. Rising costs and reduced tax benefits mean landlords are feeling the pinch.
Exam-Style Questions to Ponder
- Discuss the impact of rising interest rates on the buy-to-let mortgage market.
- Evaluate the effectiveness of tax changes in influencing landlord behavior in the UK property market.
- Analyze the relationship between rental income and mortgage affordability for buy-to-let investors.
Glossary of Key Economic Terms
- Affordability Tests: Evaluations by lenders to determine if borrowers can afford mortgage payments.
- Arrears: Overdue payments that are behind schedule.
- Buy-to-Let (BTL): A property investment where the investor buys property to rent out.
- Fixed-Rate Mortgage: A mortgage with an interest rate that remains the same for a set period.
- Interest Cover Ratio: A measure of a landlord’s ability to cover mortgage payments with rental income.
- Interest Rates: The cost of borrowing money, usually expressed as a percentage.
- Stamp Duty Surcharge: An additional tax on the purchase of properties.
- Variable Rate Mortgage: A mortgage with an interest rate that can change, typically in line with market interest rates.
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