Buy-to-let (BTL) mortgage rates have seen a gradual increase following the Autumn Budget, according to a specialist lender. This upward trend has sparked concerns about potential further hikes, particularly if the Bank of England refrains from announcing a rate cut in the coming weeks.
An analysis conducted by Octane Capital sheds light on the shifts in BTL mortgage rates over the past year. Their findings suggest a notable fluctuation in rates, especially in the months leading up to the Budget.
In March, the average rate for a two-year fixed buy-to-let mortgage with a 75% loan-to-value (LTV) was 4.83%. However, by October, just before the Budget announcement, this figure had dropped to 4.22%, reflecting a downward trend during that period.
Despite this earlier decline, the Autumn Budget appears to have reversed the trajectory, with rates now edging upward. This development has prompted industry watchers to keep a close eye on the Bank of England’s next moves, as they could play a pivotal role in determining whether this upward trend persists.
Landlords and investors are advised to stay informed and consider locking in favourable rates sooner rather than later, given the potential for further increases in borrowing costs.
In November, buy-to-let mortgage rates saw a slight increase, rising to 4.28%. However, by December, rates marginally decreased to 4.26%, showing some fluctuation towards the year-end.
Despite this small drop, the average rate of 4.26% in December 2024 was significantly lower compared to the same month in 2023, when it stood at 5.40%. This notable year-on-year decrease reflects a more favourable lending environment for landlords and investors.
According to Octane Capital’s analysis, the average buy-to-let mortgage rate for 2024 was 4.53%. This represents a substantial improvement from the 2023 average rate, which was considerably higher at 5.47%.
The downward trend in buy-to-let mortgage rates throughout 2024 can largely be attributed to changes in the swap rate market. These rates play a key role in determining the pricing of fixed-rate mortgages, including those in the buy-to-let sector.
For landlords and investors, these reduced borrowing costs have provided some relief, especially against the backdrop of broader economic uncertainty. However, with rates beginning to edge upward again in early 2025, vigilance remains crucial.
Throughout 2024, the average one-year swap rate stood at 4.81%, a notable drop from the 5.25% recorded in 2023. Similarly, the five-year swap rate averaged 4.16% over the year, down from 4.52% in the previous year. These reductions reflect a period of relative stability in the swap rate market.
However, rising gilt yields are now fuelling concerns that mortgage rates may increase in the early months of 2025. The broader expectation, though, is that these gilt yield increases might stabilise if the Bank of England opts for further interest rate cuts.
Jonathan Samuels, the chief executive of Octane Capital, highlights the cautious approach many lenders are currently adopting. He notes, “Many lenders are opting to take the hit on the margin in hopes of a future reduction. As a result, there remains a good level of opportunity for buy-to-let investors to secure a mortgage at a lower rate than they would have a year or so ago.”
Despite these opportunities, Samuels warns of potential risks. “The longer this goes on, the more likely they are to pass on this increased cost to borrowers via higher mortgage rates,” he says, reflecting on the delicate balance lenders are trying to maintain amidst economic uncertainty.
He further explains the potential impact on the Bank of England’s base rate, stating, “Does this mean that the base rate will go up? Not necessarily. If mortgage rates increase, it will push up inflation, but it will also weaken the economy. The Bank of England may be reluctant to put more stress into the economy by hiking rates, especially as growth is so limited, as this could actually push the UK into a recession unintentionally.”
Samuels advises investors to carefully consider their options for the year ahead. “If base rates are held, or even come down, lenders with variable rates linked to the base rate will likely look even cheaper compared to those fixed rates being priced off an increased swap rate,” he suggests, highlighting a potentially strategic advantage for those exploring variable rate options.