The amount of money borrowed to fund buy to let property purchases plummeted by 56 percent at the end of last year.
Rising interest rates made it increasingly difficult for buy to let landlords to cover repayments on buy to let mortgages.
The net effect is that it was no longer seen as an easy option to build property wealth and earn a good income.
Many have been inspired by TV shows such as the BBC’s Homes Under the Hammer to buy properties cheap at auction, renovate them and then rent them out.
However, the economy and interest rates turned against this tactic in the second half of last year.
Figures published by UK Finance, which is the bank trade body, show the amount loaned to make buy to let purchases was £1.8 billion in the final three months of 2023 – down 56 percent on the same period the year before.
This is the lowest level of BTL lending for a decade excluding the period of the pandemic when the property market was effectively at a standstill.
UK Finance said the strain on BTL landlords was also evident from a 124 percent surge in the number who are in arrears of 2.5 percent or more on their mortgages – taking it up to 13,570.
At the same time, there were 500 BTL repossessions during the quarter, which was an increase of 56 percent year on year.
UK Finance stress that while the number of BTL landlords who are behind on repayments is up sharply, the total proportion who are in arrears is a very low 0.68 percent.
Landlords across the country have been criticised for imposing big increases in rents in order to afford rising mortgage repayments. UK Finance said many landlords are also struggling.
In a joint blog on the UK Finance website, mortgage policy manager Ronnell Reffell and data analyst Ermir Selmani stated that the higher interest rates have significantly impacted the market.
They write: “Interest rates play a pivotal role in property investment, directly impacting borrowing capacity and landlords’ return on investment.
“With higher rates reducing profitability, we have seen weaker demand for new BTL loans for house purchase.”
They added: “When considering housing affordability, it is often forgotten that landlords are also impacted by cost-of-living pressures, and most acutely from higher interest rates.
“For BTL landlords, rent increases have not translated into higher profit margins.”
On the difficulties facing landlords, they said: “As in the wider mortgage market, the higher interest rate environment has also had an impact on some landlords’ ability to maintain their mortgage payments.
“As most landlords have interest-only mortgages, rate increases impact more significantly on the BTL sector than the residential market, whereas the vast majority of customers’ mortgages are on a capital repayment basis.
“As landlords rely on rental income to pay their mortgage, it is not usually possible to immediately increase rents each time mortgage payments rise and landlords are not always willing or able to raise rents to fully cover those increased costs, particularly where their tenants are also experiencing the same cost of living pressures.”
