Buy-to-let mortgage market shows signs of recovering

The buy-to-let mortgage market is showing signs of recovery as lenders relaunch products following the chaos caused by the mini-Budget.

The number of different deals landlords have to choose from has increased by more than 700 since the beginning of October, with 1,769 mortgages now available in the sector.

Within the total, the biggest rise has been for two-year fixed rate buy-to-let mortgages for people borrowing 25% of their property’s value, with 139 new deals launched, according to financial information group Moneyfacts.

At the same time, 130 new five-year fixed rate mortgages for landlords with a 25% deposit have come onto the market since early October.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “The buy-to-let sector has faced notable market turmoil, so it’s positive to see product choice gradually returning since the start of last month.

“A rise in choice could indicate an encouraging sentiment across lenders that appear to be adjusting their ranges to cater to landlords searching for a new deal.”

Why is this happening?

The buy-to-let mortgage sector suffered the same loss of choice as the wider mortgage market in the wake of the mini-Budget, with lenders pulling their ranges to reprice them.

The big increase in choice seen during the past couple of months is good news for those who need to remortgage, as it suggests lenders are very much open for business to this part of the market.

What’s happening to mortgage rates?

Unfortunately, the average cost of a buy-to-let mortgage has continued to increase and now stands at more than 6%.

The typical interest rate charged on a two-year fixed rate deal currently stands at 6.5%, a rise of 0.93% since the beginning of October.

Five-year fixed rate mortgages for buy-to-let landlords have seen a slightly less dramatic rise, increasing to 6.42%, up from 6.05% two months earlier.

Surprisingly, rates for landlords borrowing 60% of their property’s value have seen the biggest increases, with the cost of two-year deals jumping by an average of 1.75%, while five-year ones have risen by 1.68%.

What should I do if I need to remortgage?

Buy-to-let mortgage rates are expected to come down in the weeks ahead, so if you can afford to wait before taking out a new deal, it might be worth doing so.

That said, with house prices currently falling, you may be better off remortgaging sooner rather than later if you are very close to a loan-to-value (LTV) boundary.

For example, if you would currently only need to borrow 60% of your property’s value, but a small drop in house prices would push you above this level into the next tier, it would mean you could be charged a higher interest rate.

If you need to remortgage now, five-year fixed rates for people borrowing 60% of their property’s value currently look the best value, at an average of 5.94%.

But remember, if you take out one of these deals, you will be locking into the current high level of interest rates for five years.

Although the Bank of England base rate is expected to rise further from its current level of 3%, the official cost of borrowing is expected to start falling again within the next two years.

As a result, you may be better off opting for a two-year fixed rate deal, with these currently averaging 6.27%.

For landlords looking to borrow 75% of their property’s value, the difference is much smaller, with five-year deals averaging 6.55% and two-year ones averaging 6.53%.

Anything else I need to be aware of?

To qualify for a buy-to-let mortgage, lenders use a particular affordability test, known as the Interest Cover Ratio.

Under this test, rental income from the property has to be the equivalent of between 125% and 145% of the monthly mortgage interest payment.

So, if your mortgage rate is 6.5% and you are borrowing £200,000, your rental income would need to be between £1,354 and £1,571 a month.

There are some ways around the test. For example, you can ask your lender for ‘top slicing’ under which they will include some of your income in their affordability calculations.

But not all lenders will do this, so if you want to use top slicing, it might be worth getting help from a mortgage broker.