Buy-to-let arrears cases double in just one year

Cases of buy-to-let arrears have skyrocketed by 100% in a single year, as more landlords feel the pinch from rising mortgage rates, research from Octane Capital has found.

Arrears cases – where landlords are in the red by at least 2.5% of the loan amount – 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 have now increased for four consecutive quarters, with the latest being a 28.8% rise between the second and third quarters of 2023.

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.

Jonathan Samuels, chief executive of Octane Capital, 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.”

The Bank of England base rate increased from 0.1% in December 2021 to 5.25% in August 2023, but 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.

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.