Buy-to-let mortgage rates are pulled and may return with much higher interest

Landlords needing new fixed mortgages may struggle to find them, as swathes of major lenders have pulled deals following a dramatic drop in the value of the pound this week.

There are also fears that the loans will return to the market at much higher interest rates, with figures seen by This is Money suggesting a near one per cent increase on available five year fixes in the last week. 

This is expected to prompt landlords to increase rents so they still make a profit. 

Mortgage mayhem: Lenders are pulling loans in the buy-to-let space following a controversial Government announcement, as well as deals for owner occupiers

Almost 40 lenders, including big banks such as Halifax and Santander as well as regional building societies and buy-to-let specialists, have pulled landlord mortgages from the market while they reassess their pricing and shore up their own funding sources – and experts say more will follow suit.

It was sparked by a controversial mini-Budget delivered by Chancellor Kwasi Kwarteng, who spooked the financial markets by pledging £45billion of unfunded tax cuts and a cap on energy bills that could cost £100billion.

The pound has gained around 7 per cent against the dollar since crashing to a record low below $1.04 on Monday. 

The base rate, currently at 2.25 per cent following last week’s 0.5 per cent rise, is now tipped to rise to 6 per cent next year which would mean a massive rise in the interest rates charged on mortgages.

The move has also seen lenders pull hundreds of homeowner mortgages from the market, causing issues for those needing to remortgage or buy a new home.

Mortgage lenders are expected to launch new products for both landlords and homeowners, but not until financial markets begin to stabilise.  

One specialist lender was set to reintroduce buy-to-let products to the market at rates of around 6 per cent, a broker said. 

Rent rises: Landlords may decide to increase rents if their mortgage interest costs go up

Rent rises: Landlords may decide to increase rents if their mortgage interest costs go up

In August, the average rates on a 75 per cent loan-to-value buy-to-let mortgage was 3.51 per cent according to the estate agent Hamptons. 

‘I suspect at these rates it will make it very hard for landlords where the yields are lower,’ the broker said. ‘They will probably look to increase rents shortly.’

Rates on buy-to-let mortgages that remain available have risen significantly in the last week, following the mini-Budget and base rate increase. 

Data provided to This is Money by financial information service Defaqto shows that the average interest rate on a five-year fixed product increased 0.94 per cent between 22 and 30 September, going from  5.28 per cent to 6.22 per cent. 

This applies to all loan-to-value brackets, and covers mortgages for both individual landlords and limited companies.  

The increase on two-year fixed deals was less dramatic, however, going from 4.99 per cent to 5.16 per cent. 

Demand for two-year fixes is limited at the moment because many investors anticipate that interest rates may still be high when that period comes to an end, and wish to fix for longer to protect themselves from further hikes.  

Interest rate increases on typical buy-to-let mortgages 
Date  Average rate (all fix lengths)  Average rate (two-year fix)  Average rate (five-year fix) 
22 September 5.15% 4.99%  5.28% 
30 September  5.51%  5.16%  6.22% 
Source: Defaqto 

Angus Stewart, chief executive of buy-to-let mortgage broker Property Master, said ‘the majority’ of lenders it worked with had pulled their landlord mortgages, with ‘more to come in the coming days.’

Worryingly, other brokers told This is Money that some specialist buy-to-let lenders were withdrawing mortgage offers that had already been agreed due to the fresh uncertainty. 

This has not been the case in the homeowner market, where brokers have reported that lenders are honouring rates previously offered for those already in the mortgage application process. 

 The fear now is that we will see many landlords exit the market, resulting in a reduced supply of private rented property which will add still further to the pressure on rents

Angus Stewart, mortgage broker 

‘Lenders have withdrawn their fixed rates and are offering buy-to-let clients a variable rate if they still wish to proceed,’ one said.

‘Others are giving brokers a two week window to get an application to offer stage,’ they continued, ‘after this time fixed rate deals will not be honoured.’

Stewart continued: ‘We are seeing buy-to-let mortgage products removed from the market at an unparalleled level.

‘This is extremely worrying for the sector. We face reduced choice in the buy-to-let market which will in turn have a further impact on the rising cost of mortgages.

‘The fear now is that we will see many landlords choosing to exit the market and thus resulting in a reduced supply of private rented property which will add still further to the pressure on rents.’

Rental growth hit a record high of 11.5 per cent in the year to May 2022, according to Hamptons, but has since reduced to 7.4 per cent. The average UK property rents for £1,165 per month.

Going up: Hamptons research shows that rental growth hit a peak in May 2022

Going up: Hamptons research shows that rental growth hit a peak in May 2022

With the base rate tipped to rise further, Stewart’s advice to landlords was to secure a new fixed rate mortgage as soon as possible once deals returned to the market, protecting them against future interest rate increases.

Experts have also suggested that rising mortgage rates could prompt landlords to exit the market in significant numbers, especially as the Bank of England’s base rate is tipped to continue moving upwards.

Estate agent Hamptons has said that many will face higher outgoings when they come to remortgage.

Between August 2021 and August 2022, the average mortgage rate on a typical 75 per cent loan-to-value buy-to-let mortgage rose from 1.79 per cent to 3.51 per cent – and that was before the latest base rate increase and mini-Budget caused rates to rocket even further.

Based on the above figures, the average landlord who bought a £222,000 buy-to-let property in 2021 would have seen their annual interest-only mortgage payments nearly double from £3,010 to £5,903 if they re-mortgaged last month.

If last week’s 0.5 per cent base rate rise to 2.25 per cent was fully passed on, Hamptons said, this would increase payments to £6,743 for an investor re-mortgaging this month.

As a result, the net annual profit after costs and taxes made by a higher-rate taxpaying investor, who earns an average yield of 6.1 per cent, could fall from £3,198 in August 2021 to £212 with the new base rate, down 93 per cent, due to higher rates when re-mortgaging.

Around half of landlords fund their buy-to-let property purchases with a mortgage.

Landlord body presents its rescue plan to Chancellor 

Letter: The NRLA wrote to Chancellor Kwasi Kwarteng to outline its plan to support the buy-to-let sector and tenants

Letter: The NRLA wrote to Chancellor Kwasi Kwarteng to outline its plan to support the buy-to-let sector and tenants

In response to the events of the last week, industry body the National Residential Landlords Association has proposed a ‘cost-of-living plan’ for the sector, which it has detailed in a letter to the Chancellor.

It said its plan would help tenants to be able to pay their rent and prevent landlords from selling up, ensuring there were enough homes to rent for those that need them.

The proposals include unfreezing housing benefit rates, extending access to emergency housing support to those not in receipt of benefits,

It also advocated scrapping the £400 Energy Bills Support Scheme payment, which is in the form of a series of energy bill discounts, and instead paying it direct to every household in one go for them to use towards the increased cost of living.

Finally, it said that to encourage landlords to remain in the sector the Government should reverse the decision to restrict mortgage interest relief for landlord, and end the additional 3 per cent stamp duty levy on the purchase of homes to rent out.

Ben Beadle, chief executive of the National Residential Landlords Association, said: ‘Both landlords and tenants are struggling with the cost-of-living crisis. 

‘We need a package that supports both to prevent rent arrears and sustain tenancies.’