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Buy-to-let (BTL) mortgage rates have been dropping over the last six months, but they remain considerably higher than a couple of years ago.

This means landlords due to remortgage will face much higher repayments, and investors might think twice before expanding their portfolios.

Here, Which? explains what’s happening to BTL rates and reveals the cheapest deals currently on the market.

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

Buy-to-let mortgages rates have now fallen well below the figures recorded last summer. The average fixed-rate mortgage was priced at 6.79% in August, but has now dropped to 5.5%.

While this is good news, rates remain far higher than this time two years ago. In February 2022, the average fixed-rate mortgage cost just 3.06%.

Mortgage rates rose across the board after the government’s mini-Budget in September 2022, before peaking last August.

This came as the Bank of England increased its base rate to 5.25% to ward off soaring inflation.

The graph below shows what’s happened to fixed-rate BTL mortgage rates over the past year.

Will buy-to-let rates get cheaper?

The base rate has stabilised in recent months, giving lenders the confidence to reduce their rates slightly. 

There are hopes the base rate could fall later this year as the Bank of England closes in on its target of bringing inflation down to 2%.

This would be good news for borrowers looking to take out BTL mortgages, as lenders may reduce their mortgage rates further.

In the meantime, however, any significant price drops seem unlikely. The next base rate announcement takes place on 21 March.

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Best rates on buy-to-let mortgages

There are currently around 2,300 BTL mortgages on the market. Most are available to landlords with deposits of at least 25%, though some higher loan-to-value deals are available. 

Looking at average rates gives us a general idea of what’s happening in the market, but when you’re taking out a mortgage you’ll want to get the cheapest deal you can.

The tables show the lowest initial rates currently available on two and five-year fixed-rate buy-to-let mortgages.

As you can see, these rates are significantly more attractive, but there are drawbacks. The cheapest deals here come with substantial up-front fees, which you’ll need to factor in when comparing overall costs. 

For example, the lowest-rate 60% mortgage has a fee of 3% of the amount you borrow, so if you borrow £200,000, you’ll need to pay a fee of £6,000. 

Fee-free BTL mortgages are uncommon, but some deals do come with lower up-front fees of around £1,000-£1,500.

Two-year fixes

Source: Moneyfacts. Rates correct as of 5 February 2024

Five-year fixes

Source: Moneyfacts. Rates correct as of 5 February 2024

Are landlords selling up or staying in the game?

Landlords have sold more properties than they’ve bought every year since 2016, according to data from the estate agent Hamptons.

The sell-off was sparked by changes to mortgage interest tax relief, which significantly cut profits for many buy-to-let investors. Indeed, data from Savills shows landlords profits hit their lowest levels since 2007 last year.

Landlords who are remaining in the market are increasingly using limited companies for their portfolio, with around 50,000 buy-to-let companies set up in 2023. 

Landlords using company structures can offset 100% of their mortgage interest against their profits and pay corporation tax rather than income tax. However, mortgage rates for limited companies can be significantly more expensive.

Things landlords need to know in 2024

The last few years have been a tumultuous time for the rented sector, and 2024 is likely to spring further challenges.

The Renters Reform Bill could pass into law before the end of 2024. This will provide greater protections for tenants over rent increases and dispute resolution, but the long-planned abolition of Section 21 no-fault evictions has been delayed.

Landlords also face uncertainty over future energy reforms, after the government recently scrapped its plans to make all rented properties achieve Energy Performance Certificate ratings of C. 

See our full story on 11 things landlords need to know in 2024 to find out more about the key upcoming changes.

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