Buy-to-let mortgage choice recovers

The number of buy-to-let mortgages available has reached its highest level since before the mini-Budget as the market continues to recover.

A total of 2,400 different deals are available to people buying a property to rent out, a level last seen in July 2022, according to financial information group Moneyfacts.co.uk.

The average interest rate charged on fixed rate buy-to-let mortgages has also continued to fall.

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.”

The choice of buy-to-let mortgages for landlords fell sharply in the wake of the mini-Budget as lenders pulled their deals to reprice them.

This was because former Chancellor Kwasi Kwarteng’s announcement led to a steep increase in government borrowing costs, which in turn impacted the rates lenders pay to borrow money for fixed rate mortgages.

The average cost of the deals that were available also shot up to more than 6%.

But Chancellor Jeremy Hunt reversed most of the mini-Budget measures, helping to restore confidence and reduce government borrowing rates.

As a result, lenders have gradually relaunched their mortgage ranges and reduced the interest rates they charge, despite the Bank of England’s Bank Rate actually increasing during the same period.

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.”

Higher interest rates not only make a mortgage more expensive to service, they also make it more challenging to pass lenders’ affordability tests.

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, according to our latest Zoopla Rental Index.

The typical cost of renting a home increased by 11.5% in 2022 to stand at £1,118, with London seeing a 16.1% increase, while in Scotland rents rose by 12.5%.