Cases of buy-to-let arrears have skyrocketed by 100% in a single year, as more landlords feel the pinch from rising mortgage rates.
The research comes from specialist property lending experts, Octane Capital, which analysed quarterly arrears cases where the mortgage balance is in arrears of at least 2.5%. The data runs from the start of 2019 and the present day.
It found that arrears cases reached a record high of 11,540 in the third quarter of 2023, 100.3% higher than the equivalent period in 2022, when there were only 5,760 cases.
Cases of buy-to-let arrears have now increased for four consecutive quarters, with the latest being a 28.8% rise between the second and third quarters of 2023.
Tough year finally hits landlords
While many landlords have been able to shield themselves from the effects of higher mortgage rates and energy costs, clearly that’s not possible for every investor, especially if they’re in a region with a strong supply of rentals.
The proportion of total buy-to-let loans sitting in arrears has risen by 0.29% year-on-year, doubling from 0.28% in Q3 2022 to 0.57% in Q3 2023.
Affordability could improve
The one positive for investors is the Bank of England base rate, which increased from 0.1% in December 2021 to 5.25% in August 2023, has been on hold since then.
Further steep increases seem unlikely, as the inflation rate fell sharply to 4.6% in October, meaning the Bank is seeing evidence that the higher base rate is having the desired effect in curbing inflation.
This improved confidence will surely filter down to mortgage lenders, who could start cutting their rates as they look to compete with one another for business.
Gap closing between residential and buy-to-let
While buy-to-let pains are worsening, residential homeowners are still more likely to be in mortgage arrears, as 1.0% of residential loans were in the red in Q3, compared to 0.57% for buy-to-let.
However cases of arrears in the residential space have actually fallen by -1.8% year-on-year, so the gap is closing between buy-to-let landlords and owner-occupiers who are struggling.
CEO of Octane Capital, Jonathan Samuels, said, “Tough conditions in 2023 have finally filtered through to landlords, as arrears cases have more than doubled year-on-year.
“While landlords are usually better placed than homeowners in riding out times of trouble, investors still have to price rents according to the market rate, so it depends on the region whether they’ve been able to fully absorb rising costs with higher rents.
“There’s a tricky balancing act when it comes to hiking rents, as steep rises risk alienating existing tenants and resulting in a void period, negating any benefit.
“The good news for landlords who are struggling is the period of escalating interest rates appears to be over, as steadier inflation means the Bank of England has less of a need to increase the base rate again, which could filter through to increasingly competitive mortgage rates.”