With many landlords weighing up their position, we take a look at what’s happening in the buy-to-let market.

With mortgage rates high and house prices expected to fall by up to 5% in some areas, many buy-to-let landlords are wondering if they should stay in the market.

But despite the uncertain economic outlook, demand for rental homes is growing, and a shortage of properties is pushing rents higher.

We take a look at what’s happening right now in the buy-to-let market, and what the future is likely to hold.

What’s happening to buy-to-let mortgages?

Like the rest of the mortgage market, buy-to-let loans were hit by former Chancellor Kwasi Kwarteng’s mini budget.

The number of products available dropped steeply to just 988 different deals in the wake of Kwarteng announcing his fiscal plans, compared with 1,942 before the mini budget.

But the good news is that lenders are returning to the market, with just over 1,400 different products currently available to choose from.

Are buy-to-let mortgage rates rising?

The less good news is that interest rates on buy-to-let mortgages have increased significantly since the beginning of the year.

The average cost of a two-year fixed rate mortgage for an investment property has jumped from 2.94% in January to 6.76% now.

Around 2% of this increase is the result of hikes to the Bank of England Bank Rate – the official cost of borrowing – the rest has been driven by the market’s response to the mini budget.

The cost of five-year fixed rate mortgages has followed a similar pattern, rising from an average of 3.18% at the beginning of the year to 6.73% now.

To put these increases into context, a landlord borrowing £200,000 on a two-year fixed rate mortgage would see their monthly payments on an interest-only mortgage jump from £490 in January to £1,127 now, if they borrowed at the average rate.

Tracker mortgages currently look better value than their fixed rate counterparts, with 2 year buy-to-let deals averaging 4.42%.

But it is important to remember that these mortgages move up and down with changes to the Bank Rate.

If the Bank Rate increases from its current level of 2.25% to 5%, as some economists are predicting, a tracker mortgage rate that is currently 4.42% would rise to 7.17%.

What should I do if I need to remortgage my rental property?

The mortgage market is currently in a state of flux.

Rates have fallen slightly after some market confidence was restored by the appointment of Jeremy Hunt as Chancellor, and they may fall further as the cost of government borrowing continues to drop.

But at the same time, the Bank Rate has risen to 3% in a bid to bring inflation down from its current level of 10.1%.

5 year fixed rate mortgages are currently slightly cheaper than two-year ones at 6.73%, compared with 6.76%.

Although economists expect interest rates to rise further, with the UK expected to go into recession, they are not expected to remain high for long.

If you are due to remortgage on more than one buy-to-let property in the near future, you may wish to hedge your bets by opting for different mortgage terms on the properties.

It is also important to note that the rates quoted are average rates, and more competitive deals are available on the market, particularly if you have a large equity stake in your property.

If you can afford to do so, it may be worth using savings to reduce the amount you need to borrow through a mortgage, if this enables you to qualify for a lower loan-to-value tier.

For example, if you are looking to borrow 70% of the property’s value, but can reduce this to just 60% by using savings, you are more likely to qualify for the most competitive rates a lender has.

Will higher interest rates make it harder to get a mortgage?

Lenders use specific affordability tests when assessing people for buy-to-let mortgages.

Known as the Interest Cover Ratio, lenders typically want rental income from the property to be equivalent to between 125% and 145% of the monthly mortgage interest payment.

So, if your mortgage rate is 6.76% and you are borrowing £200,000, your rental income would need to be between £1,408 and £1,634 a month.

If you are worried about passing this stress test, you can ask your lender for ‘top slicing’ which means they will include some of your income in their affordability calculations.

Not all lenders will do this, and if you want to go down this route, it might be worth using the services of a mortgage broker to help you.

What’s happening with rents?

Mortgage rates are rising, but so are rental rates.

New rental rates have increased by £115 during the past year to average £1,051, according to our latest Rental Market Report.

Rents are rising so sharply because there is a significant mismatch between supply and demand in the sector.

A combination of tax rises and increased regulation during the past few years have led to many investment landlords selling up and exiting the sector.

This has resulted in there being too few properties in the private rental sector to meet demand.

The number of homes on the market to rent are currently around half the level seen during the past five years.

Meanwhile, the number of people looking to rent a home is 142% higher than five years ago.

We expect this trend to continue in 2023, putting further upward pressure on rents.

Are house prices likely to fall?

Unlike in the rental market, demand has fallen recently among people looking to buy a home.

In fact, demand from potential buyers dropped by a third since the mini budget, according to our latest figures.

This fall in demand, combined with higher mortgage rates, which will impact affordability, is expected to lead to some localised house price falls next year.

But we are not anticipating steep drops. Instead, we think the average cost of a UK home may dip by around 5%.

It’s important to see this in the context of the strong increase in property values since the start of the pandemic, with a 5% fall only taking house prices back to where they were in the first part of this year.

Over the longer-term, house prices are likely to resume their upward trend, as the UK continues to fail to build enough new homes each year to keep pace with rising population growth.

What new regulations are being introduced?

The government has pledged to introduce the Renters Reform Bill during this Parliament.

The Bill includes measures to protect renters from unfair rent increases, while no fault evictions will be banned, homes will have to meet minimum standards and it will be easier for renters to have pets.

The changes are largely focused on improving the quality of homes in the private rented sector, with the government estimating that 21% of properties are currently unfit.

But for landlords who already maintain high standards, the new bill is not expected to lead to significant extra costs.

Nor is the government reported to be considering any new tax changes for landlords, such as the previous changes to mortgage interest tax relief and the end of the ‘wear and tear’ allowance that caused many landlords to exit the sector a few years ago.

Should I purchase a buy-to-let property?

The answer to this question will very much depend on your individual circumstances.

But with buyer demand generally falling, first-time buyers delaying getting on to the property ladder, and house prices expected to dip, you are likely to be in a strong position to negotiate a discount on the asking price.

Meanwhile, demand from renters is strong, and rents are continuing to rise.

That said, with average mortgage rates currently high, it is important to make sure you do your sums to ensure a buy-to-let property is affordable.

With many households struggling with cost-of-living increases, you should also think about whether you would be able to afford monthly mortgage interest payments on a buy-to-let property if your tenant fell behind with their rent, or you had a period when the property was not rented out.

What’s the outlook for the buy-to-let market?

The buy-to-let property market is likely to encounter some ‘bumps’ in the coming year as a result of higher mortgage rates and the impact of the cost-of-living squeeze on renters.

House prices could also dip, reducing the value of investment properties.

But with demand for rental homes massively outstripping supply, and strong rent increases expected over the medium term, buy-to-let properties could still be a good bet over the long term for those who can afford to ride out short-term issues in the market.

Key takeaways

  • Lenders are returning to the buy-to-let mortgage market following the chaos caused by the mini budget, with more than 1,400 different products currently available
  • The average interest rate is 6.76% on a 2 year fixed rate buy-to-let mortgage and 6.73% on a 5 year one
  • Rents have increased by £115 during the past year to average £1,051
  • Demand from renters significantly exceeds supply, which will continue to push rents higher