The volume of lending for buy-to-let (BTL) house purchases has more than halved over the course of 2023, with the number of new mortgage loans being granted dropping from 25,280 in Q4 2022 to 12,422 in Q1 2024.

UK Finance’s latest BTL update also found that the BTL mortgage market shrunk for the first time, from just over two million outstanding BTL mortgages in Q1 2023 to 1.98 million Q1 2024.

The financial services firm said that rapidly rising interest rates have played a "major role" in this trend, making it harder for those looking to buy a BTL property to pass lenders’ affordability tests.

Furthermore, the stamp duty surcharge on second and subsequent properties, which came into force in 2016, and the progressive removal of higher-rate income tax relief on mortgage payments for rental properties, have also made being a BTL investor "more challenging and less attractive".

Although rents have increased across this period, UK Finance has said that the rising costs of being a landlord means that it is not as profitable as it once was.

It was found that most BTL borrowers continue to choose fixed rate mortgages, with 90% of new lending during the past two years being done on a fixed rate basis. However, when compared with the residential sector, a larger proportion of BTL mortgages are on variable rates.

By the end of the first quarter of 2024, 13,570 of the 1.98 million outstanding BTL mortgages were in arrears.

UK Finance added that while this was a 93% increase year-on-year, it accounts for just 0.68% of all BTL mortgages and the number hasn’t increased since the last quarter of 2023.

The proportion of BTL mortgages in arrears has risen more than among residential mortgages holders because most BTL mortgages are interest-only, meaning they are affected more by higher interest rates.

There were also 600 BTL possessions during Q1 2024, compared with 430 a year earlier. Although this is a 40% increase, it is still below the number before the pandemic.

Head of analytics at UK Finance, James Tatch, said: "A flexible and well-run private rental sector is an essential part of the housing market. Landlords face a number of challenges, from changing regulations to rising interest rates, but have shown resilience.

"However, given the new government is committed to abolishing Section 21 'no fault' eviction notices, it must make sure that responsible landlords have other options for when they have legitimate reasons to take their property back. Without more unexpected negative shocks, strong rental demand and strong lending standards could mean the buy-to-let sector emerges from last year’s downturn sooner than previously expected. Also, that further rises in arrears are limited.

"Lenders continue to offer a range of support to anyone who’s worried about their finances, with teams of trained experts ready to help. If you are struggling, please reach out to your lender as soon as possible to discuss the support options available."

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