The number of buy to let (BTL) landlords falling into arrears climbed significantly in recent times according to UK Finance’s figures published 8 February 2024:
The increase is significantly higher than the increase seen in homeowners’ arrears - an about turn on previous trends - where BTL mortgage arrears were, for many years, always below those of owner-occupied mortgage holders.
The trend represents the highest number of BTL mortgage arrears seen over the last five years, as well as the highest proportion of the total loan amount.
A total of 41,090 landlords fell into arrears on their mortgage in 2023, an average of 10,273 per quarter
Despite better rates coming down the track, as base rates stabilised, now that the inflation rate is on a downward trajectory, currently rates are at their highest since 2008, many landlords find themselves in trouble.
Landlords who own their properties outright, those who are very lowly geared, or are on long-term fixes are somewhat protected from the squeeze. But that still leaves many BTL landlords feeling the pinch. This, coupled with a hostile tax regime and the threat of tighter letting rules to be introduced in England, many have been rushing for the exit.
The landscape has conspired against the small-scale buy to let landlord in recent years, ever since Chancellor George Osbourne’s days back in 2015.
First came George Osborne’s tax changes under Section 24 of the Finance Act - phased in over a five-year period between April 2017 to April 2020 - removing the BTL landlord’s ability to deduct those additional costs from the income they earn on their properties, before it's taxed.
The changes also included the removal of a 10 percent depreciation allowance on furnishings and a 3 percent sur-charge on stamp duty (SDLT). All because Orsborne, suffering political flak from the general public, and long-suffering first time buyers, reasoned that:
"Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income whereas homebuyers cannot, and the better off the landlord, the more tax relief they get."
In addition, landlords were made to declare the income used to pay their mortgage first, on their tax return, while under the old system they could declare rental income after deducting mortgage repayments. This created an illusory income rise which results in pushing some landlords into a higher rate tax bracket, meaning a considerably higher tax bill.
As inflation rose to its highest level for decades, following the Bank of England’s money printing in the Covid interlude, interest rates were increased to tame it. As a consequence, we have a significant increase in mortgage rates.
The result has been something of a perfect storm for the BTL landlord, that’s before you factor in the anxieties introduced through the threat of the removal of the landlord’s safety cushion – the Section 21 eviction concession originally introduced in the House Act 1988, with the Assured Shorthold Tenancy. All that could soon go.
Higher mortgage rates are also having the effect of putting mild downward pressure on house prices, with the result that some landlords are edging further towards negative equity, if not beyond it – that is, their outstanding mortgage amount is higher than the market value of their property, a precarious position to be in. However, given the shortage of housing and net migration, there seems little chance that house prices will fall far.
The Renters (Reform) Bill, currently coursing through parliament, albeit with some difficulties, threatens the biggest change to BTL since the aforesaid act, including several radical changes that worry many landlords. So much so that there’s been something of a mass exodus from the sector.
Although this is adding to a rental housing shortage, pushing up rents, which in theory should help landlords, in practice there’s a limit to how far landlords can increase their rents. Increasing them to the maximum in an effort to cover mortgage costs, and still make a profit, inevitably results in some tenants being unable to afford them.
The impetus behind the reform bill is to strike a balance between security of tenure for tenants - preventing so called retaliatory and unfair evictions - while still making letting property attractive to BTL landlords. After all, the sector provides a valuable service for those, especially the young, and increasingly families, who need rental housing in the face of rapidly rising house prices. Getting on the housing ladder is increasingly out of reach for many.
If landlords cannot make a reasonable return on their investments long-term, they will inevitably leave the sector. With a combination of rental income (yield), enough to cover mortgage payments, and with some left over, plus added to capital growth prospects, landlords need to see a reasonable return for their efforts.
“Painting landlords as greedy ogres won’t stop evictions – letting them make a profit will”, says “The Secret Landlord”, writing for the Daily Telegraph.
It’s hard to fathom Michael Gove’s strategy towards landlords: on the one hand he comes out this last week saying that he backs landlords:
“The overwhelming majority of landlords do a great job. They want to have a relationship with their tenant that goes beyond just cash. They want to make sure that they’re providing a service that the tenant appreciates. So, of course I listen to landlords.”
On the other hand, Gove is intent on driving though a bill that many landlords fear. He says he is “entirely committed to ensuring no-fault evictions are banned before the next general election. We just want to make sure that this Bill works for them [landlords] as well because you need a healthy private rented sector.”
Many landlords are finding it difficult to square this circle, especially knowing that if section21 is abolished this year. That is given the parlous state of the justice system, the courts already clogged with eviction cases, and bailiffs under-resourced. Achieving any necessary evictions will be almost impossible within a reasonable time.
“As a landlord I’m always ready to kick a tenant out. I don’t care how good they’ve been or how long they’ve stayed at a property. If they so much as dare ask for anything to be repaired, that’s it: Section 21, they’re out. Of course, with rents hitting record highs I’ve got an AI scrooge-bot that scours the market and makes a cash machine *kerching* sound every minute I can put the rent up. And I duly do. If they so much as whimper they can’t afford it, I serve a Section 21. I have them pre-printed. I sleep with them under my pillow. It brings me comfort to know the misery I could inflict on my customers. That’s landlord life, according to a number of housing charities and campaign groups.”
As the old journalist’s refrain goes: “why spoil a good story for the sake of the truth”. Why not paint the BTL landlord as the ogre they’ve created. They’ve become prime targets, pilloried in the press, by the public and long-suffering tenants.
Except it’s both landlords and tenants who are long-suffering: by attacking landlords it’s most likely it’s tenants who suffer most in the end.
In reality it’s not that landlords want to evict tenants just for the sake of it. This cynical view expounded by some - highlighted by The Secret Landlord - is far from the mark: by far the majority of landlords treat their tenants well, want to keep them as long as possible, and many keep rents artificially low for long periods.
Yes, the use of Section 21, according to the Ministry of Justice’s latest figures, covering April to June 2023, compared to the same quarter in 2022, shows landlord possession claims increasing by 24 per cent. But is this through choice? It’s often through necessity, either serious rent arrears, other serious breaches of the contract or because the landlord is now deciding to sell.
The Ministry’s own analysis cites “changes in regulations and rising interest rates with the corresponding increases in mortgages may have contributed to uncertainty for landlords in the short-term and has very likely led to some landlords selling their properties and exiting the rental market.”
There you have it: if that’s not confirmation enough, the main reason why landlords are issuing more Section 21 notices is because landlords are exiting the sector. Is it not that the government has brought this situation on itself?
Landlords will continue to rent out their properties so long as it makes economic sense to do so. They are not charities, they are not there as a public service, putting up with bad tenants who can’t pay a reasonable rent.
As The Secret Landlord says:
“I am not a housing provider and I am not a charity. I have no interest in subsidising my tenants’ lifestyles at the expense of my own. And I am not alone. According to research, nearly a third of UK landlords plan on selling at least one property.”
With the introduction of the Renters (Reform) Bill imminent, it’s really no surprise that landlords who are worried about its impact are thinking about leaving the sector and many are getting out now. There’s no clear timeline for when Section 21 will go, if indeed it does go given the hold-ups in the bill.
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