February 3, 2025 2:38 pm

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Nikka Sulton

Buy-to-let landlords are currently facing a challenging financial environment, with higher interest rates and costs significantly affecting their investments. Many landlords are hoping for a decline in interest rates, similar to the trend homeowners and first-time buyers are hoping for. According to UK Finance, nearly two million buy-to-let properties are mortgaged, and the average mortgage rate for both two-year and five-year fixed deals is above 5%. The lowest available deals are attractive, but the associated fees are hefty, prompting landlords to carefully consider their mortgage options.

Factors such as whether a property is owned personally or through a limited company also impact the mortgage landscape for landlords.

 

How cheap are buy-to-let mortgage rates? 

Many landlords who have a mortgage on their buy-to-let properties are now seeing their profits severely impacted by higher mortgage rates. This is particularly challenging for those who had become accustomed to the ultra-cheap financing that was available in previous years. A significant number of mortgaged buy-to-let investors have relied on interest-only mortgages, which allowed them to maintain better cash flow. However, with the rise in interest rates, this has resulted in a substantial increase in monthly payments. For instance, a £200,000 interest-only mortgage with a five-year fixed rate of 5.56% would now cost a landlord £926 per month.

These rising costs are compounded by additional expenses that landlords face, including periods where the property is vacant, maintenance, repair work, letting agent fees, compliance checks, insurance, and service charges. With all these factors at play, many landlords are finding themselves in a position where their reliance on rising rents is becoming more crucial to ensure profitability. The current environment, with higher interest rates and mounting costs, has made it difficult for landlords to maintain a stable income from their properties.

 

What about limited company mortgage rates? 

A record number of landlords have been establishing limited companies to purchase buy-to-let properties, driven by a desire to reduce taxes on their investments. Between January and September of the previous year, there was a 23% increase in the number of buy-to-let companies formed, reaching 46,449. This trend, noted by property firm Hamptons through Companies House data, provides an alternative to personal ownership. While rates for limited company mortgages tend to be slightly higher, they offer tax advantages, allowing landlords to fully deduct mortgage interest costs from their tax bills.

Many landlords are opting to incorporate their portfolios into limited companies or sell off properties due to tax changes that have caused profits to turn into losses. Howard Levy, director at SPF Private Clients, points out that landlords who fixed their mortgage rates three, four, or five years ago will face upcoming reviews in the next 12 to 24 months. These decisions will largely hinge on the prevailing interest rates, especially around the time the fixed terms expire.

In response to this growing demand, new players like Metro Bank have entered the limited company buy-to-let market. Historically, only specialist lenders serviced this space, but smaller building societies such as Leeds, Leek, Family, Mansfield, and Nottingham are now offering products for landlords who choose to incorporate. According to Chris Sykes, technical director at Private Finance, the market is likely to become less niche over time as more mainstream lenders, including high street banks, get involved. These new entrants typically target smaller landlords purchasing through limited companies, offering more competitive rates than specialist lenders who usually serve larger portfolio owners.

However, as landlords build portfolios of around ten properties or more, they often need to partner with more complex lenders who cater to niche markets. Specialist assets, such as Houses in Multiple Occupation (HMOs) and Multi-Unit Freehold Blocks (MUFBs), require specific lending arrangements that go beyond the reach of typical buy-to-let products. Furthermore, while holiday lets are now widely accepted by building societies, recent tax changes could result in more lenders offering limited company products for holiday lets as well, expanding the options available to investors.

 

What does it mean for landlords? 

Many landlords remortgaging today have grown accustomed to rock-bottom mortgage rates. For example, someone who purchased a property five years ago at an average fixed rate of 2.5% would have faced a monthly mortgage payment of around £417 for a £200,000 loan. However, due to the current higher rates, they are now likely to face £926 or more per month.

Although mortgage rates are lower than the peak in mid-2024, the situation remains challenging. In July 2024, the average two-year fixed rate for buy-to-let mortgages peaked at 6.97%, while the five-year fixed rate hit 6.82%.

For landlords with a £200,000 interest-only mortgage, fixing a rate in July would have meant monthly payments of £1,137. Fortunately, some landlords can find better deals by using a whole-of-market broker, particularly if they have significant equity in their property.

However, it’s important to note that the lowest buy-to-let rates often come with high fees, sometimes as much as 10% of the mortgage amount. For a £200,000 mortgage, this could amount to £20,000, making it essential to carefully assess the overall cost, including both fees and interest rates.

To secure the best deal, landlords typically need a deposit of at least 40% or 40% equity in their property when remortgaging. This ensures access to the most competitive rates available.

Chris Sykes from Private Finance believes the situation for landlords is significantly better now compared to last year. He points out that rates have stabilised, which boosts landlord confidence, and there may even be reductions as the year progresses. This, he hopes, will align with base rate predictions.

Sykes has noticed a surge in interest from both experienced landlords and newcomers looking to build buy-to-let portfolios. However, he suggests that landlords now need to work harder to make a profit, with many asking about financing renovations, such as converting houses into flats or making properties habitable.

 

How to assess where mortgage rates are heading? 

Many landlords are cautious about locking into higher fixed-rate mortgages now, only to find that they could have secured a more favourable rate later. At present, financial markets are predicting that the Bank of England’s base rate will fall from 4.75% to 4% by the end of 2025, with some experts forecasting further reductions in the years to come. These expectations are reflected in swap rates, which are crucial for determining mortgage rates. If the forecasted base rate cuts materialise, mortgage rates should eventually decrease. However, any significant reduction in fixed mortgage rates will depend on whether expectations for lower interest rates are realised over the coming months and years.

Swap rates are financial market indicators that help lenders determine where interest rates might be in the future. As of late January, five-year swap rates were at 3.92%, while two-year swaps were at 4.06%, showing a slight downward trend from the beginning of the year. Historically, mortgage rates typically don’t fall much below these swap rates. This means that for fixed mortgage rates to drop significantly, expectations for the base rate must continue to decline.

Chris Sykes, associate director at Private Finance, mentions that if swap rates remain at a higher level, we may see some increases in fixed-rate mortgages. However, he suggests that as the year progresses and base rates are expected to decrease, we could see reductions in swap rates, which would likely lead to a reduction in mortgage rates. It will be crucial to monitor the upcoming months as these predictions solidify.

 

What are the best buy-to-let rates? 

Here’s a summary of some of the best buy-to-let mortgage deals available for landlords, based on a property value of £200,000, as of 3 February 2025.

For those owning in their personal name, mortgage rates start with a 40% deposit. NatWest offers a five-year fixed rate at 4.35% with £1,054 fees, while Santander provides a five-year fix at 4.58% with only £59 fees. For those with a 25% deposit, NatWest offers a 4.42% rate on a five-year fixed mortgage, and The Mortgage Works provides 4.04% with a 3% fee.

If you’re looking for tracker rates, HSBC offers a two-year tracker at 5.84%, and TSB provides a 5.59% rate.

Limited company landlords can find favourable options too. Leeds Building Society offers a five-year fix at 5.39% with £1,499 fees, while Vernon Building Society offers a two-year fix at 5.99% with £499 fees.

For full details, including specific terms and conditions, please check with the relevant financial institutions or consult a mortgage broker.

 

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