BTL sector recovering from ‘turbulent period’, report finds
The UK buy-to-let (BTL) sector seems to be stabilising following a period of uncertainty, as arrears fall and rental growth outpaces borrowing costs.
Research from Morningstar DBRS said the period when tax relief was removed, landlord costs were higher, regulatory changes were introduced, and financing costs were rising faster than rental yields “eroded landlord margins”.
However, as of July this year, the share of BTL loans in 30 or more days of arrears fell to 2.9%, down from a peak of 4% two years ago. Further, the proportion of loans in 90 or more days of arrears declined from 2.4% to 1.8% over the same period.
At the same time, rental yields have continued to improve, and recent data from the Office for National Statistics (ONS) showed a rise in the average private rent.
This rose to 3.7% in July, compared to a 2.8% rise in average BTL mortgage costs.
Additionally, UK Finance data showed that the average interest cover ratio (ICR) increased to 221% in Q1, up from 204% last year. Morningstar DBRS said that although this was down on pre-2022 levels, where the ICR typically exceeded 300%, it was still comfortably above the 125-145% range BTL loans are underwritten to.
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The report said this showed that rents were outpacing borrowing costs.
However, Morningstar DBRS said that because refinancing activity was driving the trend rather than new purchases, the overall size of the UK BTL mortgage market was still contracting.
BTL mortgage market shrinks
Morningstar DBRS said BTL originations remained subdued when compared to 2021 and 2022, before rates started to increase. This is despite new lending figures showing a 3.3% rise in Q1 2026 and an upward trend since 2024. It found that the growth in originations was initially driven by BTL fixed rates maturing in 2023.
The stock of outstanding BTL mortgages has continued to decline, falling by around 1.3% year-on-year in Q1 and contributing to a longer-term fall seen since Q1 2023.
The report found that the contraction of the BTL mortgage market was slowing but were also a sign of changes that have occurred over the last few years, such as higher interest rates and costs, and the introduction of the Renters’ Rights Act. As this coincided with some fixed rate periods ending, some landlords decided to exit the market, which subsequently suppressed property supply and supported rental growth.
Regulation reshapes rental sector
Morningstar DBRS said BTL landlords now faced higher administrative overheads and challenges removing problem tenants because of the Renters’ Rights Act, which both increased the risk of rental arrears and rental inflation.
Further, the Making Tax Digital rules that came into effect in April “created additional hurdles for landlords”, while other tax drags had already impacted or were due to impact landlord finances.
It referenced the reduced allowances for capital gains tax and stamp duty surcharge on additional residential properties, both introduced in 2024.
Landlords are also dealing with a 2% increase to basic and higher rates of dividend tax, reducing what they can extract from limited companies. Further, the basic, higher and additional rates of tax for property income will rise by 2% next year, while reliefs and allowances will only be applied to property, savings, and dividends after they have been used on other sources of income.
Further, the government is proposing tighter energy-efficiency rules, which would require rental properties to have an Energy Performance Certificate (EPC) rating of at least C by 2030, resulting in higher costs for landlords.
Separate research from Morningstar DBRS suggested landlords only made the minimum improvements to meet previous standards, so rental properties may need significant additional investment to meet the proposed target.
Fewer BTL loans in arrears
BTL arrears have started to fall, after rising sharply during 2023 and 2024, then steadying in 2025.
Still, arrears rates remain relatively high when compared to pre-pandemic levels, which the report said reflected pressure on BTL profitability due to higher financing costs.
There was also a clear difference between the performance of portfolios originated before the global financial crash and those originated afterwards. Pre-global financial crash loans had higher rates of arrears, with 30-plus and 90-plus-day arrears ratios at 7.5% and 5.4%, respectively, as of July 2026. However, as these mortgages are typically on variable rates, they benefitted from lower loan pricing when compared with the 2024 peak in mortgage rates.
Loans originated after the global financial crash were found to be performing better, due to being underwritten to tighter standards.
BTL outlook seems ‘favourable’
The report said regulation, reduced profitability and financial penalties for non-compliance were a headwind to the UK BTL market, and for some landlords, selling up would be the “only sensible option”.
It added that smaller, self-employed landlords may believe the effort and expense needed to restructure their business into a limited company may be prohibitive, but this could be an investment opportunity for larger corporate landlords, especially if rates fall and rents continue to rise.
Morningstar DBRS said the residential mortgage-backed securitisation (RMBS) outlook “appears relatively favourable”, as arrears fell and rental inflation contributed to ICRs. Further, the exit of smaller landlords has made way for more professional landlords, who should be able to absorb costs and administrative burdens better.
Andrew Lynch, vice president and sector lead for European structured finance ratings at Morningstar DBRS, said: “The UK rental sector appears to be entering a new phase in which improving operating performance is increasingly offset by regulatory and compliance pressures.
“Falling arrears, higher rental income and stronger affordability metrics are supporting BTL mortgage performance today, but our analysis suggests many landlords have historically responded to energy-efficiency requirements by making only the minimum upgrades necessary for compliance.
“As policymakers consider raising the minimum EPC requirement to band C by 2030, the sector may face renewed investment demands that could further reshape rental supply, landlord behaviour and credit risk dynamics across the housing market.”
