Landlords Face Rising Mortgage Rates

Mortgage interest rates are shaping the buy-to-let market for landlords as thousands of cheap, fixed-rate deals end for rented homes.

Landlords must decide whether to sell or keep letting the property with profits hit by higher interest rates, rising costs and an unfriendly tax regime.

Landlords selling means fewer buy-to-let homes on the market, pushing up rents, while keeping means lower rental profits and possibly missing better returns from alternative investments.

Some 230,000 fixed-rate buy-to-let deals end this year, while landlord mortgage rates have trended upward over the past four months.

Two-year fixed-rate deals expiring this year are priced at an average rate of 2.90 per cent. Landlords wanting another two-year fix must pay an average of 5.49 per cent, according to mortgage monitor What Mortgage data.

Higher taxes and costs

For a home priced at £200,000, monthly payments surge from £483 to £915.

Rents have increased in the same period, but so have the maintenance costs, letting agent fees, insurance, ground rents and service charges, compliance, and insurance, which are deducted from the rent.

Restricting mortgage interest tax relief to 20 per cent of the amount paid and reducing the capital gains tax annual allowance has an impact, too.

Since April 2021, individual landlords have had claims for mortgage interest relief slashed from 100 per cent to 20 per cent.

The CGT allowance, which provided tax-free relief for landlords, has shrunk from £12,300 in the 2022-23 tax year to £3,000 in 2023-24.

Company mortgages cost more

Many landlords trade as limited companies, which lets them claim 100 per cent mortgage tax relief, but mortgages and the fees associated with them are more expensive.

Average corporate mortgage rates are 5.69 per cent - a monthly interest-only payment of £948.

Cheaper deals are sometimes available from brokers, but lenders often only offer them at a risk-free 60 per cent loan-to-value and attach massive fees of up to 10 per cent of the mortgage amount.

Predicting how mortgage rates will change is impossible.

Much depends on how General Election 2024 pans out and the contents of the winning party’s first budget. Analysts expect the Bank of England to cut the official interest rate from 5.25 per cent to around 3.75 per cent by the end of 2024.

Will mortgage rates fall?

However, mortgage rates are priced according to swap rates. These rates try to forecast where interest rates will be in two or five years when today’s fixed-rate deals end. The markets expect two-year fixed rates of around 4.5 per cent.

Looking back, fixed-rate mortgages tend to track swap rates, so unless the new government orchestrates a startling economic revival, the cost of fixed-rate buy-to-let mortgages is likely to stay the same during the life of the next Parliament - which ends after five years in 2029.