Recent data from personal finance comparison platform, finder.com, highlights a stark reduction in annual returns on buy-to-let properties in the UK. The drop, exceeding £4000 in June 2023 compared to June 2022, has ignited concerns about landlords exiting the rental market, potentially leading to a diminished supply of rental accommodations.

The study took into account diverse metrics such as monthly average buy-to-let mortgage rates, house prices, and rent prices across the UK to gauge the potential returns for those procuring a new mortgage deal at different periods.

In June 2022, landlords availing a 2-year fixed-rate buy-to-let mortgage could expect an average monthly return of £609 post-interest deductions, equating to an annual income of £7,312. Fast forward to June 2023, the average monthly return had plummeted by 59% to £250, leading to an annual total of just £2,995 — a striking yearly decline of £4,317.

A prominent factor behind this descent is the meteoric rise in buy-to-let mortgage rates. Consecutive increments in the base rate have led to an escalation in mortgage rates, affecting both the buy-to-let and the residential market sectors. While the UK experienced a 1.6% decline in average house prices from September 2022 to June 2023, this decline was overshadowed by the rise in interest rates. In July 2023, buy-to-let interest rates surged to an average of 6.18%. Furthermore, data from the ONS House Price Index revealed that the average UK house price for June 2023 was £287,546, juxtaposed against a buy-to-let mortgage rate of 5.45% for the same month. This escalating expense associated with owning buy-to-let properties has dissuaded many landlords from venturing into new deals.

A parallel trend can be observed in the realm of buy-to-let property lending. The first quarter of 2023 saw the value of buy-to-let mortgage lending in the UK diminish by a staggering 40%, dwindling to £5.8 billion from £9.7 billion in the preceding quarter. Year-on-year comparisons further accentuate this trend, with the value of loans granted witnessing a 44% dip from the £10.3 billion recorded in the corresponding period of 2022.

Another telling statistic from this research reveals that buy-to-let loans comprised a mere 9.8% of the total mortgage lending in the initial quarter of 2023. This percentage is reminiscent of numbers last observed in 2011, indicating the current tepid interest in investing in buy-to-let properties.

Commenting on the findings, Kate Steere, deputy editor and housing expert at finder.com, said:

“We’re seeing a trend of landlords pulling out of the buy-to-let market as consecutive base rate hikes have made it unprofitable for them to continue. This will have a worrying impact on an already competitive rental market, leaving renters with fewer options and rising costs as they attempt to navigate the cost of living crisis.

Even though we’ve seen house prices start to come down, and 40% of experts from our recent panel believe a housing market crash is on the horizon, any landlords who are coming off a fixed rate now will no doubt be put off by the staggering mortgage rates which are now over 6%, compared to less than 2% two years ago.”

Readers can see the full research here.