Buy-to-let mortgage choice recovers

The number of buy-to-let mortgages has hit an all-time high since the mini budget as the market continues to recover.

According to a financial group moneyfacts.co.uk nearly two and a half thousand buy to let deals have been made available, a level that hasn't been seen since July 2022.

With average interest rates continuing to gradually fall on fixed rate buy to let mortgages the typical cost of a two-year fixed rate deal is now 5.81%, while interest on a five-year one has dropped to 5.72%.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “It is encouraging to see buy-to-let product choice gradually recover from the shock surrounding the fiscal announcement.”

Why did this happen?

In the wake of the mini budget buy-to-let mortgage lenders pulled almost all of their deals to reprice them with options for landlords dwindling. Available options that were left shot up to more than 6%.

This was due to former Chancellor Kwasi Kwarteng's announcement that led to government borrowing costs rising, which in turn impacted the rates lenders pay to borrow money for fixed rate mortgages.

Since Chancellor Jeremy Hunt has been in place almost all of the mini-Budget measures have been reversed. This has led to higher confidence levels and a reduction in government borrowing rates.

Despite the Bank of England's Rate actually increasing lenders have been able to offer more buy-to-let products and reduce the interest rates they charge in the same period.

What should I do if I need to remortgage?

Unfortunately, despite the fall in interest rates, if you are coming off a two-year or five-year fixed rate deal you are still likely to face a significant increase in your monthly repayments.

For someone borrowing 60% of their property’s value, the average two-year fixed rate mortgage was 2.14% in March 2021, compared with 5.39% now, the equivalent of £542 a month more on a £200,000 interest-only mortgage.

The difference is slightly less for five-year deals, with these rising from an average of 2.74% in March 2018 to 5.22% now, which would increase monthly payments by £413 on a £200,000 interest-only loan.

But these are only average rates, and there are better deals available if you shop around.

Springall said: “The drop in average buy-to-let rates appear more subdued than seen within the residential mortgage sector, but lenders have made moves to entice new business.”

What’s the background?

Higher interest rates can make it more challenging to pass lenders’ affordability tests as well as make a mortgage more expensive to service.

Lenders use a different affordability test for buy-to-let mortgages compared with mortgages for your main home, known as the Interest Cover Ratio.

Under this test, the rent you receive from the property must be the equivalent of between 125% and 145% of your monthly mortgage interest payment.

If your rent isn’t high enough to meet this affordability test, some lenders will allow you to do something called ‘top slicing’, under which they include some of your income in their affordability calculations.

That said, average rents have also risen at their highest rate for a decade, up approximately 15% in our local area.

The information does not constitute financial advice or recommendation and should not be considered as such. Bennett Jones Partnership and it’s authors are not financial advisors and it is therefore not authorised to offer financial advice.

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