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Rising mortgage costs – what do buy-to-let landlords need to know?

Landlord looking at calculator and mortgage costs

Mortgage costs for buy-to-let landlords are rising due to the response to the mini-Budget, a fluctuating pound, and the cost of living crisis.

So what does this mean for you and how can you stay on top of rising rates?

Why are mortgage costs increasing?

The government announced plans for a £45 billion unfunded tax cut in its recent mini-Budget. This led to instability in the financial markets and fluctuations in the value of the pound.

As a result, the average rate on a new two-year fixed mortgage has risen above six per cent for the first time since 2008.

This prompted mortgage providers to pull hundreds of deals from the market. Figures from Moneyfacts show more than 40 per cent of available mortgages were withdrawn in immediate response to the mini-Budget.

Since then the availability of mortgages has improved, but they’re now more expensive. Rising mortgage costs are estimated to affect 100,000 remortgaging homeowners and first-time buyers each month.

Buy-to-let lenders withdraw products

After the dramatic drop in the value of the pound, lenders including banks like Santander and Halifax pulled their products from the market to make sure their prices kept up with the current level of inflation.

They also wanted to make sure their funding was secure and could cope with demand in an unstable market.

As the market has stabilised, lenders are considering how much business they’ll take on. This is because they might risk being overwhelmed if they launch at a lower rate than their competitors.

David Hollingworth, of the brokers L&C Mortgages, said: “That thing about capacity and service and volume is a big thing for lenders,” suggesting why banks may not make decisions quickly.

Products return but at higher rates

Mortgage lenders that pulled their products are either waiting for the market to calm down or are coming back with products at much higher interest rates.

For example, 95 per cent of Santander’s mortgage products have returned to the market with a significantly higher interest rate.

Its average two-year fixed rate now sits at 6.64 per cent and its five-year fixed rate at 6.59 per cent. Before this sudden change in the market, most fixed-rate mortgage products had an interest rate of between two and three per cent.

According to Moneyfacts, the average two-year fixed mortgage rate rose to 6.46 per cent on 13 October, the highest rate since 2008. The average five-year fixed rate was 6.28 percent, which was close to a 14-year high.

Even though the market has settled since the initial reaction to the mini-Budget, lenders may be hesitant to lower their interest rates too soon through fears of becoming overwhelmed with demand.

And with an autumn statement scheduled for 17 November, further market instability could be on the way.

But when the market eventually settles, lenders will be keen to offer more competitive prices so interest rates could start to decrease.

How are buy-to-let landlords affected by rising mortgage rates?

The Bank of England’s base interest rate was at a record low of 0.1 per cent between March 2020 and December 2021.

Since then, it’s increased seven times to reach 2.25 per cent in October 2022.

Rates are expected to rise further in the coming months due to a combination of rising inflation and the negative reaction of financial markets to the mini-Budget.

The Bank of England said that the number of people struggling to pay mortgages would rise sharply in 2023.

As lenders respond to the Bank of England’s rate rises, here’s how both new and existing landlords could be affected:

  • landlords buying properties will have to factor in higher the cost of higher mortgage repayments, which means they may have to consider cheaper properties
  • investors looking for a new mortgage deal could be hit with a much higher interest rate when their existing deal runs out
  • those who move onto a standard variable rate at the end of a fixed deal are likely to see their mortgage costs rise significantly

What could higher buy-to-let mortgage costs mean for the rental market?

Alongside the increased costs for landlords, how could higher mortgage rates have a knock-on effect on the wider rental market?

  • landlords may increase rents to cover higher buy-to-let mortgage repayments
  • squeezed landlord finances could lead to less money being spent on property upkeep and maintenance
  • landlords could be discouraged from buying properties, making the stock shortage worse and putting further pressure on rents
  • tenants may find it more difficult to buy properties and stay renting for longer. This could lead to higher short-term demand for landlords’ properties, but long-term pressure on the supply/demand imbalance and affordability
  • a lack of investment and demand for properties could lead to downward pressure on house prices. This means landlords who’re looking to sell in the future could lose out on capital gains

How can landlords get the best deal?

Many landlords who are considering buying a new property or have a fixed-rate mortgage that’s due to expire in the coming months will be concerned about the rising cost of buy-to-let finance.

Although market conditions are likely to remain uncertain for the foreseeable future, there are steps you can take to minimise the impact of rising mortgage costs.

  • stay ahead of the curve – monitor the market frequently and make sure you start thinking about your next mortgage deal months in advance. Most lenders allow you to negotiate a new rate six months before the end of your existing deal
  • weigh up all the costs – although you may have to pay more upfront, it could be beneficial in the long run to leave your current deal early, pay the early repayment charges, and get a new fix at a lower rate
  • get the best advice – a professional broker can help you to assess your options and make sure you get the best fixed deal for your needs

This article is intended as a guide only. Please get advice from a banking and finance expert if you’re not sure of anything.

Read our in-depth guides for more tips on managing your mortgage costs:

What happens next?

In an effort to stabilise the market, the goverment will publish an autumn statement and Office of Budget Responsibility (OBR) report on 17 November.

The statement will outline how the government’s debt will be repaid and the independent OBR report will assess the health of those plans.

On 3 November, the Bank of England will announce whether it will increase the base interest rate further.

How do you feel about rising buy-to-let mortgage rates? Let us know in the comments below.

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Zach Hayward-Jones and Conor Shilling

Zach is a writer for Simply Business that specialises in covering breaking news and government updates.

Conor has worked as a professional writer for 10 years, specialising in the buy-to-let market, landlords, and small business finance.

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