To illustrate that, average interest rates on two-year fixed-rate buy-to-let mortgages have increased from 1.8% pre-pandemic to 6%+ today.

These rate rises follow on from various government policy changes that have adjusted the shape of the buy-to-let market. This includes the phasing out of mortgage interest tax relief from 2017-2020 and an extra 3% stamp duty on second homes from 2016.

High inflation and the rise in Bank of England base rate and swap rates show that the market does not expect the return of lower rates for a long while yet. People talk of a ‘new normal’ but this is more of a ‘normal normal’, last seen pre-2008 before the onset of the global financial crisis and 15 years of historically low rates.

Today there are just over two million buy-to-let mortgages outstanding for circa £300 billion. Buy-to-let is a resilient asset class with debt arrears lower than owner occupied mortgages in every year for the last 25 years bar one.

In 2022 there was around £53bn of new and remortgage buy-to-let lending and although headline volumes in 2023 are down on that, these figures hide significant segment trends.

Turning professional

We have seen the market react in two ways – professionalisation and incorporation – and the sector today is split into amateur and professional landlords

Professional landlords will tend to have portfolios of properties, hold complex property types such as HMOs or MUFBs and will purchase properties within limited company structures. They consider their leveraged investment returns more objectively on a cashflow basis.

Each of these elements enables professional landlords to navigate the market better than amateurs:

• A portfolio of properties will have different dates for tenancy agreements and refinancing mortgages, spreading out the cliff effects of having a single property as an amateur landlord
• HMOs and MUFBs return higher yields that single family rentals and the funding cost differential continues to reduce
• Incorporation (limited companies) enables tax relief on interest charges under company law.

Today, 22% of the £300bn of buy-to-let mortgages are in limited companies, up from 15% three years ago and the trend is accelerating.

This year 74% of new buy-to-let purchases were in limited companies, rising from 41% in 2015. This is the area of buy-to-let that Landbay is focused – 78% of our live book is in limited companies.

While the overall market has contracted slightly, there is still strong activity and mortgage assets are being created in the growing professional and incorporated segment.

Will professional landlords be in difficulty as more roll onto higher rates?

Professional landlords see that lenders are responding with innovative products to help them. At Landbay, we have variable fee products to help affordability, more generous stressing on Like 4 Like remortgages, cheaper low LTV options and competitive no ERC tracker products.

You have to remember the fundamentals. Firstly, fixed mortgage rates are driven by future expectations of base rate, i.e. swap rates, not current base rate. Therefore, mortgage rates will start falling before base rate does.

Secondly, rents will continue to rise because of the demand/supply mismatch for rental accommodation.

Therefore, a combination of these two factors will mean the affordability issues are likely to start to ease.

Are professional landlords still buying properties?

Yes, although there is a lot of remortgaging business out there, 45% of our applications so far this year are purchases.

We recently surveyed some of our borrowers and 41% are planning to or considering purchasing additional properties in the next 12 months, while 17% were undecided – it is an investors’ market today.

It’s all about cashflow, with the continued macro picture of increasing rental demand and limited supply, the rental yields will increase overtime.

You could argue that if you can make it work now, you can look forward to it getting better. With less house purchasing competition, as a professional landlord today, it is a great time to buy.

Julian Cork is chief operating officer at Landbay