The number of new UK buy-to-let mortgages granted by lenders has fallen by more than half in just over a year, while the sector has shrunk for the first time in almost three decades.

New data issued by the banking body UK Finance underlines that higher mortgage costs, on top of broader cost of living pressures, have taken their toll on many landlords, prompting a growing number to sell up.

Meanwhile, some people who might previously have opted to become landlord investors have turned their back on the sector because of tax changes that have made it less profitable.

UK Finance said landlords with just one rental property “are more likely to feel the pinch from higher interest rates”. Its figures showed that the number of new buy-to-let mortgages granted fell from 25,280 in the final three months of 2022 to 12,422 in the first three months of 2024.

“Rapidly rising interest rates played a major role in this trend, making it harder for those looking to buy a buy-to-let property to pass lenders’ affordability tests,” the organisation said.

The landlord sector has been growing for nearly three decades, ever since the first buy-to-let products were launched in 1996, but has now shrunk for the first time, albeit only slightly, with the number of outstanding mortgages falling from 2.039m in the first three months of last year to 1.98m in the same period this year.

The original boom in buy to let was triggered by legal changes relating to tenancies in the 1990s, plus a tax regime that favoured landlords. The sector enjoyed runaway growth, but in 2015 George Osborne, then chancellor, cut tax relief for property investors, and ditched a key landlord tax break.

However, several more years of strong house price growth and growing demand for rental properties gave buy to let a fresh boost, until a string of mortgage rate rises from 2022 put the brakes on the sector.

UK Finance said all these developments had made being a buy-to-let landlord “more challenging and less attractive … Despite rents increasing, the rising costs of being a landlord means that it’s not as profitable as it once was.”

The number of buy-to-let landlords behind with their payments has also risen sharply. At the end of the first quarter of this year, 13,570 of the 1.98m outstanding mortgages were in arrears, – up 93% on the same three months a year earlier. However, the banking body said this was still only 0.68% of all buy-to-let mortgages, and that the number had not increased since the final three months of 2023.