Mortgage deals reached their highest interest rates in 14 years as the cost of borrowing reached more than six per cent in October 2022.
Buy-to-let mortgage rates have soared since Chancellor Kwarsi Kwateng announced his Growth Statement last month.
The two-year buy-to-let fix attracts a rate of 4.24 per cent, while a five-year fix has a 5.99 per cent rate attached.
A year ago, the average buy-to-let loan came with a 2.34 per cent rate.
The changes do not affect landlords already on fixed deals, but those on variable rates feel the pinch from extra interest payments.
Landlords at risk
Most at risk are landlords coming to the end of a fixed rate who need to refinance. A survey suggests one in three landlords with mortgages must refinance before the end of the year.
The research shows around 66 per cent of all buy-to-let mortgages are fixed-rate deals, while trackers (17 per cent) and variable rates (15 per cent) are less common.
“Borrowers may well be concerned about the rise to fixed mortgage rates, but it is essential they seek advice to assess the deals available to them right now,” said Rachel Springall from online financial platform Moneyfacts.
“Fixing for longer may seem more appealing, particularly as both the average two- and five-year fixed rates rise to levels not seen in over a decade. Consumers must carefully consider whether now is the right time to buy a home or to wait and see how things change in the coming weeks.”
What is mortgage interest?
Mortgage interest tells a landlord the cost of borrowing money to buy or refinance a property.
A mortgage can come with fixed, variable or tracker rates.
Banks and building societies are independent businesses that can add any amount they feel appropriate as a cost of borrowing. This reflects in the interest rate level – the higher the rate, the more expensive the cost of borrowing.
The interest rate makes a real difference to a landlord’s expenses.
For example, a landlord with a £100,000 mortgage at a rate of 2.5 per cent pays £2,500 in interest yearly. Another landlord with a 5.2 per cent deal borrowing the same amount pays £5,200 a year.
Don’t forget the more extended the mortgage term, the more a loan costs. Interest on a £100,000 loan over ten years is cheaper than the interest charged over 15 or 20 years.
Different buy-to-let mortgages
Borrowers can choose one of several common mortgage types, which, along with the term, impacts the interest rate charged.
A borrower pays a fixed amount, typically for two or five years. After the fixed term ends, the borrower can refinance to another cheap deal or continue paying interest at the variable rate.
Variable rate mortgages
The lender sets the mortgage rate, which can change from time to time. The main factor impacting the rate is if the Bank of England base rate changes.
A tracker rate is usually the Bank of England base rate plus a margin set at the lender’s discretion. For example, if the base rate is 2.25 per cent and interest on a buy-to-let tracker is 6.5 per cent, the lender is loading the rate by 4.25 per cent. Should the base rate go up another 0.5 per cent, the tracker interest will rise to seven per cent.
Mortgages can go down and up, but the lender won’t let a landlord pay nothing or, even worse, pay the borrower if rates fall into the red. If this happens, a collared rate pegs the minimum interest rate a borrower will pay.
How mortgage interest rates are set
Buy to let lenders set mortgage rates based on various factors, although movements in the Bank of England rate seem to provoke most change.
The overall rate considers the cost of borrowing to the lender. The primary sources of the money lent as buy-to-let mortgages are savings held for customers or borrowing from another bank, and loans between banks are often at the official base rate.
Other factors involved in rate setting include the borrower’s credit history and risk. Risk is reflected in the loan to value, the amount a lender is ready to advance for a property purchase or remortgage.
Lenders also need to price at competitive rates to attract borrowers.
Considering these factors, each bank and building society sets their interest rates for customers.
What’s the ‘official’ interest rate?
The Bank of England’s monetary policy committee sets the base rate or official interest rate once a month.
The rate is a tool to control inflation. Raising or dropping the rate influences borrowing and the cost of living, and lifting the rate is seen as pushing down inflation.