Buy-to-let landlords are being hit by higher interest rates, higher costs and a less friendly tax regime.
Many have seen their costs spiral, meaning that landlords will have watched the recent falls in mortgage rates with just as much interest as homeowners and first-time buyers.
There are roughly 2 million buy-to-let properties that have a mortgage attached, according to the trade association for the banking and financial services sector, UK Finance.
An estimated 230,000 of these have fixed-rate mortgage deals that are due to end this year.
While the residential rates aimed at home buyers and homeowners have hogged the headlines, average buy-to-let rates were until recently heading downwards.
However, since the start of February some lenders have upped rates once again leading to average rates slightly rising over the last three months.
We look at what landlords need to consider when taking a new mortgage, and list some of the best deals available. Both for those who own in their own name and for those who own via a limited company.
How cheap are buy-to-let mortgage rates?
Many landlords who own with a mortgage will be seeing their profits decimated by higher mortgage rates, having been lulled into a false sense of security by the ultra-cheap finance available in recent years.
Mortgaged buy-to-let investors often use interest-only mortgages to ensure higher cashflow. But when paying interest-only, if the mortgage rate doubles or triples, so do the monthly payments.
Both the average two-year fixed rate buy-to-let mortgage and five-year fixed rate are currently sticking around 5.6 per cent, according to Moneyfacts.
It means a typical landlord requiring a £200,000 interest-only mortgage on a two-year or five-year fix will need to pay £934 a month in mortgage costs if buying or remortgaging at the moment.
Add that to the cost of periods where the property is empty, repairs, maintenance, letting agent fees, compliance checks, insurance and service charges and it shows how reliant many landlords will be on rents rising in order to turn a profit.
What about limited company mortgage rates?
For those who own in a limited company, average rates are typically slightly higher with bigger product fees on top.
The average two-year fixed rate limited company mortgage is 5.67 per cent, according to Moneyfacts, while the average five-year fixed rate limited company morgage is 5.92 per cent.
The downside is that these will likely be accompanied by higher fees. The upside is that limited company landlords can fully deduct their mortgage interest costs from their tax bill.
Howard Levy, director of buy-to-let lending at mortgage broker SPF Private Clients, says: ‘Many landlords who own in their own name are incorporating their portfolios, and others are selling up given the profits they were making are now losses due to tax changes.
‘Many landlords fixed their mortgages five years, three or four years ago, so there will be a tranche of funds coming up for review in the next 12 to 24 months and it will be interesting to see what occurs.
‘The main determinant will be where interest rates are at that time, or more specifically about four to six months prior to those rates expiring.’
Limited company surge: More than two-thirds of existing buy-to-let companies were set up between 2017 and 2023 when the tax changes were phased in
What does it mean for landlords?
Many of the landlords who are now remortgaging had become accustomed to rock bottom rates.
For example, someone who purchased five years ago will have enjoyed an average five-year fixed rate of 3.56 per cent.
It means on a £200,000 mortgage they would have factored in monthly mortgage costs of around £594 – not the £917 they are likely to face when remortgaging today.
That said, mortgage rates have fallen since summer last year meaning the situation is not as dire as it was.
The average two-year fixed rate for buy-to-let reached a high of 6.97 per cent in July, while the average five-year fixes hit 6.82 per cent.
On a £200,000 interest only five-year fixed rate mortgage, that’s the difference between having to pay £1,137 a month when fixing in July compared to £934 a month at the moment.
Some landlords will do much better than the market average, by using a comparison site or using a whole-of-market mortgage broker to find them a cheaper rate. This will depend to some extent on how much equity they have in the property.
Financial shock: Many landlords who own with a mortgage will be seeing their profits cut down by higher mortgage rates
A word of warning here: many of the lowest buy-to-let mortgage rates come with staggeringly high fees. These can be as high as 10 per cent of the total mortgage amount in some cases. On a £200,000 mortgage that would equate to £20,000.
This means it’s essential to look at the overall cost of the mortgage and factor in both the fees and the interest rate.
To secure the cheapest deal, landlords will also typically need to be buying with at least a 40 per ent deposit or be remortgaging with at least 40 per cent equity in the property.
Howard Levy adds: ‘The increase in rates impacts landlords and investors who are looking to take out a mortgage now so I would recommend getting ahead of this by booking mortgage rates as early as possible, so that you have an option ready to proceed.
‘If rates drop in the meantime, then a new application can be applied for, but if rates increase then at least the booked option is in reserve.’
Expert: Howard Levy, director of buy-to-let lending at mortgage broker SPF Private Clients
How to assess where mortgage rates are heading?
Lenders tend to price their fixed-rate mortgages based on future market expectations for the Bank of England’s base rate.
In recent months, forecasts for where the base rate would eventually peak have fallen from a high of 6.5 per cent in the summer to 5.25 per cent.
The base rate has been held at the same level of 5.25 per cent since August 2023 and analysts believe the Bank will cut it two or three times in 2024.
That could send the base rate to 4.5 per cent by the end of 2024.
Market expectations are reflected in swap rates – financial market rates which anticipate where interest rates will be in two and five years’ time, when fixed mortgages lent today will expire.
Five-year swaps are currently at 4.2 per cent and two-year swaps are at 4.7 per cent – both trending below the current base rate of 5.25 per cent.
Only as recently as July, five-year swaps were above 5 per cent. Similarly, the two-year swaps were coming in around 6 per cent.
That said, the direction of swap rates has slightly changed since the beginning of 2024.
They are up when compared to the start of the year, five-year swaps were 3.4 per cent and two-year swaps were 4.04 per cent.
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‘Buy-to-let lenders are repricing upwards at present,’ says Levy.
‘With Swap rates rising there have been minor adjustments to reflect the increases.
‘Lenders are also managing their pipeline business and can reprice should their service suffer due to volume of applications.
‘Rates will continue to hover where they are until either the US reduces its interest rates or the UK inflation figures appear to be under control.
‘Inflation seems to be moving in the right direction but the Bank of England is reluctant to reduce rates too early until it is certain that it is not going to climb back up again.’
Should you fix or take a tracker?
The case in favour of fixing for five years
Five-year fixes currently offer the cheapest deals, and having certainty over monthly payments for the next five years may also appeal to some borrowers, given how much interest rates have shot up over the past 24 months.
And fixing for five years, rather than two years, can sometimes enable landlords to borrow more.
This is because lenders tend to impose more generous affordability tests.
Howard Levy adds: ‘The bigger landlords seem to be sticking with five-year fixes, preferring to lock in for the longer term.
‘They do get the equivalent of pound cost averaging though, as rate expiries are coming up for these clients all the time, so if rates drop they book a five-year fix at that time for the next few properties for example.
‘For those who own buy-to-lets in their personal name, typically, a five-year fix will be stressed at a lower rate than a two-year fix.
‘Given the existing borrowing, higher rates and higher interest cover ratios, it may not be possible to raise the level of funds required without fixing for five-years in some cases.’
‘Paying higher product fees, achieving higher rental incomes, or not being classed as a higher-rate taxpayer are also ways to boost maximum borrowing levels.’
The case in favour of fixing for two years
Many of those opting for a two-year fix will be doing so because they think interest rates will fall over the next couple of years.
They are banking on the expectation that once inflation subsides, the base rate – and then mortgage rates – will come down, allowing them to fix at a cheaper rate.
Nicholas Mendes of mortgage broker John Charcol says: ‘Predicting the trajectory of mortgage rates over the coming years is still risky business and while it is important to understand the market and make a balanced view on future rate movement it should not influence your decision if your someone who requires a longer period of stability. Getting the right advice is key.
‘If inflation continues to pose a challenge, we should expect bank rate to higher for longer, which would in turn result in a period of higher mortgage rates.
‘But, given the current movement and overall landscape I do expect to see a reduction in August and potentially one more by the end of the year.’
Howard Levy of SPF Private Clients argues that many landlords are avoiding the stress testing required for shorter fixes by sticking with their current lender when they refinance.
He adds: ‘Two-year fixed rates don’t usually fit stress tests on a remortgage, unless the loan-to-value is relatively low, but they would be available for a product transfer.
‘We are seeing many clients opt for a two-year fix for a product transfer with the view that in two years’ time rates will be lower so they can remortgage onto a more palatable rate.’
The case in favour of a tracker mortgage
Those that are confident of rates falling faster and further than expected may even be trying their luck with a tracker mortgage.
Trackers follow the Bank of England’s base rate, plus or minus a set percentage.
For example, someone could be paying base rate plus 0.75 per cent on top with a tracker. With the base rate at 5.25 per cent, they’d pay 6 per cent at present.
But if the base rate was cut to 4.5 per cent, for example, their rate would fall to 5.25 per cent.
The main benefit of tracker deals is that they typically don’t come with early repayment charges.
This means if mortgage rates fell over the coming year, someone with a tracker deal could switch to a cheaper fixed deal as and when they liked.
On the flip side, if the base rate stays the same or even rises this year, it could end up becoming an expensive gamble.
Gamble: At present, borrowers opting for a tracker deal will likely pay more than if they fix. The hope is that interest rates will fall.
It’s also worth pointing out that at present, tracker rates tend to be more expensive than fixed rates.
Howard Levy adds: ‘The margin on tracker rates seems to have remained relatively high compared to the pricing of five-year fixes so they are proving less popular.
‘With it looking as though base rate will come down gradually, many are opting for the certainty of a five year fix and a higher loan amount rather than the tracker with its possibility of future reductions and a lower loan amount.’
What are the best buy-to-let rates?
Below, we highlight some of the best deals available to buy-to-let landlords.
Buy-to-let mortgage rates often come with product fees that can be as high as 10 per cent of the loan. The below are the deals with the cheapest overall annual costs when both the initial rate and fees are taken into account.
This is based on the property value being £200,000. The mortgages sourced are available for remortgage deals. For those purchasing, rates may be slightly different.
Cheapest deals for those owning in their personal name
40% deposit mortgages
Five-year fixed rate mortgages
The Co-operative Bank has a five-year fixed rate at 4.39 per cent with £1,499 fees at 60 per cent loan to value.
HSBC has a five-year fixed rate at 4.78 per cent with £0 fee at 60 per cent loan to value.
Two-year fixed rate mortgages
The Co-operative has a two-year fixed product at 5.18 per cent with no fee at 60 per cent loan to value.
HSBC has a two-year fixed rate at 5.38 per cent with £0 fees at 60 per cent loan to value.
25% deposit mortgages
Five-year fixed rate mortgages
The Co-operative Bank has a five-year fixed rate at 4.54 per cent with a £1,499 fee at 75 per cent loan to value.
Barclays has a five-year fixed rate at 4.6 per cent with £1,594 fees at 75 per cent loan to value.
Two-year fixed rate mortgages
The Co-operative has a two-year fixed rate at 5.33 per cent with a £0 fee at 75 per cent loan to value.
Bank of Ireland has a two-year fixed rate at 5.13 per cent with £995 fee at 75 per cent loan to value.
Best two-year tracker without early repayment charges
40% deposit
HSBC has a two-year tracker at 6.34 per cent with a £0 fee at 60 per cent loan to value. This is base rate (5.25 per cent) plus 1.09 per cent.
Santander has a two-year tracker rate at 5.6 per cent with £1,798 fees at 60 per cent loan to value. This is base rate plus 0.35 per cent.
25% deposit
HSBC has a two-year tracker rate at 6.44 per cent with a £0 fee at 75 per cent loan to value. This is base rate plus 0.69 per cent.
Santander has a two-year tracker rate at 5.84 per cent with £1,798 fees at 75 per cent loan to value. This is base rate plus 0.59 per cent.
