BY: Doug Hall, Director, 3mc
As we move through 2024, it’s clear that the buy-to-let market is undergoing a significant transformation. At the time of writing, in early October, headlines may focus on the challenges – economic uncertainty, interest rates and speculation of CGT increases in the Budget — but there are also reasons for optimism. The latest data and market trends suggest that we are entering a period of recalibration rather than decline. For landlords who can adapt to the changing conditions, there are still plenty of opportunities to be found.
Market overview: A year of recalibration
According to the latest quarterly data from UK Finance, published in July, the buy-to-let market in Q1 2024 saw £7.0 billion in new loans advanced. This figure represents a 17.3% decline compared to the same quarter in 2023. However, it’s essential to put these numbers into context. The first quarter of 2023 was the strongest quarter in a year where overall lending was low, and this makes the year-on-year comparison seem more dramatic than it might otherwise appear. My expectation is that, when the figures come out for Q2 2024, they will show growth in comparison to the same quarter in 2023 and I also believe that we’ll see growth for the overall year in 2024 compared to 2023.
Moreover, the UK Finance data does not account for Product Transfers – where a landlord switches to a new deal with their existing lender – and these have grown as a proportion of the market over the past couple of years. Many landlords have opted to ‘drop anchor’ by sticking with their current existing lenders.
At 3mc, we’ve observed this trend for ‘dropping anchor’ first-hand. Over the past two years, the majority of Product Transfers we’ve arranged have been on 2-year fixed rates, which means we will be re-engaging with those landlords sooner rather than later.
Rising yields: A silver lining
One of the more encouraging trends in the buy-to-let market has been the increase in rental yields. In Q1 2024, the average gross buy-to-let rental yield across the UK was 6.88%, up from 6.23% in the same quarter of the previous year. This increase suggests that rental income is beginning to catch up with the higher mortgage costs that landlords have been facing.
For landlords, this is a crucial development. Higher gross yields mean that investments are becoming more attractive. This trend also reflects the broader dynamics of the UK housing market, where demand for rental properties continues to significantly exceed supply. As long as this imbalance persists, there will be opportunities for landlords to achieve strong returns on their investments.
Interest Rates: The Tide is Turning
The interest rate environment of the last couple of years has put pressure on landlords’ finances. However, there are signs that we may have passed the peak of this cycle. In Q1 2024, the average interest rate across all new buy-to-let loans was 5.40%. While this is 0.76% higher than in the same quarter of 2023, it is 0.30% lower than the previous quarter, indicating the start of a downward trend.
The recent decision by the Bank of England to cut the base rate in August, with more cuts expected in the coming months, suggests that we are moving into a lower rate environment, and this will be a welcome relief for landlords, as it will help to reduce mortgage costs and improve cash flow. It is also likely to encourage more landlords sitting on cash savings to reconsider how they restructure their finances as falling rates impact savings as well as mortgages – and, with buy-to-let yields increasing, there may be greater incentive for landlords to use their cash reserves to help finance new property investments that could provide a better return.
Reflecting the changes to mortgage rates, the average buy-to-let interest cover ratio (ICR) for (essentially the rental income achieved on a property as a percentage of the mortgage payments) in Q1 2024 was 191%, according to UK Finance. This was up from 180% in Q4 2023 and while it is still below the 206% recorded a year earlier, the upward trend is encouraging. As interest rates are expected to continue to fall, we think ICRs will improve further, providing landlords with greater financial stability.
Looking ahead: Reasons for optimism
There are several more reasons to be optimistic about the outlook for the buy-to-let mortgage market. First, lenders want to lend, and this means they are improving their propositions to make them more competitive, both in terms of rate and criteria. Barely a week goes by currently without new announcements by buy-to-let lenders.
Second, speculation about the upcoming Budget may focus on potential tax increases, but the political landscape appears to be stabilising. Initiatives announced in the The Renters’ Rights Bill have, on the whole, already been tabled for some time, and the bigger picture of a new government, with a strong majority, brings a level of certainty that you don’t get in the months leading up to a general election.
The private rental sector (PRS) plays a crucial role in housing around a fifth of the UK’s households and contributes significantly to the economy – and this mustn’t be forgotten. The economic impact of the PRS extends well beyond landlords and their tenants. Around half of all landlords finance their investments with buy-to-let mortgages, supporting jobs in lending, intermediary services, and related industries, including tradespeople. This creates a ripple effect of economic activity, which has an impact on a much wider range of sectors.
Furthermore, recent research by Paragon Bank highlights that more than half of landlords planning to expand their portfolios are looking to purchase properties in need of work. This approach not only increases the capital and rental value of their investments but also contributes to the broader economy by employing contractors and purchasing materials. It can also help regenerate areas, creating new opportunities for local businesses.
Conclusion: Adapting to the new normal
As we move further into 2024, the buy-to-let market is undoubtedly facing a period of change. However, this change does not necessarily mean decline. For landlords who are willing to adapt to the new landscape, there are still plenty of opportunities to achieve strong returns.
The key to success in this environment will be flexibility and a willingness to embrace new strategies.
It’s highly recommended to seek legal advice, and stay up to date with changes in UK landlord and tenant law. You could consider joining a landlord association such as the NRLA to help you stay compliant, save time and stress, save money, and ultimately help see your rental business thrive. Read more about the NRLA.
This information is a general overview and not exhaustive, so be sure to conduct further research or consult legal professionals for specific guidance based on your situation, location, and circumstances.
At 3mc, we have a team of expert advisers who can discuss all your mortgage requirements. If you would like to discuss your options, give the 3mc team a call on 0161 962 7800.
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*Your home may be repossessed if you do not keep up repayments on your mortgage. 3mc (UK) Ltd is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register https://register.fca.org.uk/s/ under reference 302992. Please note: The FCA do not regulate Business Buy to Let Mortgages.
