The volume of lending for buy-to-let (BTL) house purchases more than halved over the course of 2023, according to a banking and finance industry body.

The number of new mortgage deals being granted for this purpose fell from 25,280 in the fourth quarter of 2022 to 12,422 in the first quarter of this year.

Rapidly rising interest rates played a major role in this trend, making it harder for those looking to buy a BTL property to pass lenders’ affordability tests, UK Finance said.

It added that the stamp duty surcharge on second and subsequent properties, which came into force in 2016, and the progressive removal of higher-rate income tax relief on mortgage payments for rental properties have also made being a landlord more challenging and less attractive.

The BTL mortgage market has shrunk, from 2.04 million outstanding BTL mortgages in the first quarter of 2023 to 1.98 million in the first quarter of 2024.

Landlords with just one property make up one third of the BTL market, UK Finance said.

It added that 10% of BTL mortgages are held by landlords who have set up as companies.

At the end of 2023, there were 13,570 BTL mortgages in arrears, but this number remained flat in the first quarter of 2024 and represents just 0.68% of all BTL mortgages, UK Finance said.

Mortgage lenders continue to offer tailored support to anyone struggling with their mortgage payments.

UK Finance said that, despite rents increasing, rising costs have squeezed landlords’ profits.

In the first quarter of 2018, the average interest cover ratio – how much of a landlord’s mortgage costs are covered by their rental income – was 342%. By the first quarter of 2024 the figure was 191%.

Some 90% of new BTL lending during the past two years being done on a fixed-rate basis.

However, when compared with the residential sector, a larger proportion of BTL mortgages are on variable rates, which has contributed to proportionally more BTL mortgage holders falling into arrears, the report said.

James Tatch, head of analytics at UK Finance, said: “Without more unexpected negative shocks, strong rental demand and strong lending standards could mean the buy-to-let sector emerges from last year’s downturn sooner than previously expected, also that further rises in arrears are limited.

“Lenders continue to offer a range of support to anyone who’s worried about their finances, with teams of trained experts ready to help. If you are struggling, please reach out to your lender as soon as possible to discuss the support options available.”