Buy-to-let landlords remortgaging this year are confronting a dramatic squeeze on profits as mortgage rates have climbed sharply, compounded by a fresh tax increase announced in the October 28 Budget. The Chancellor revealed a 2 per cent rise in the income tax that landlords pay on rental income, adding to a 2 per cent increase from last year's Budget. From April, landlords will face a combined 4 per cent income tax surcharge on rent received. According to UK Finance, the trade association for the banking and financial services sector, almost two million buy-to-let properties carry mortgages.
The scale of the rate shock is substantial. Moneyfacts data showed the average five-year fixed rate buy-to-let mortgage currently stands at 6.04 per cent. A landlord taking out a typical £200,000 interest-only mortgage on a five-year fix at these rates would face monthly mortgage costs of £1,007. That compares sharply with someone who purchased five years ago, who would have enjoyed an average fixed rate of around 2.5 per cent and monthly costs of approximately £417 on the same loan size. Although mortgage rates remain lower than the average two-year fixed rate high of 6.97 per cent reached in July 2023 and the five-year high of 6.82 per cent that same month, the burden on landlords is acute when combined with maintenance costs, letting agent fees, compliance checks, insurance and service charges.
Landlords seeking to refinance have a choice between fixed and tracker options, each with different trade-offs. Five-year fixed rates offer certainty over payments and lenders typically apply more generous affordability tests for five-year terms than two-year ones. However, two-year fixes offer slightly lower rates for those prioritising cashflow and betting that interest rates will fall within two years. The lowest five-year fixed rate available according to latest figures is 4.23 per cent, though this comes with very substantial fees. Specialist providers like The Mortgage Works offer a five-year fixed rate at 4.64 per cent with a 3 per cent arrangement fee and £280 valuation fee at 75 per cent loan to value. For those willing to take tracker risk, BM Solutions offers a two-year tracker at 3.79 per cent plus base rate, with a 1 per cent arrangement fee.
Lenders assess affordability for buy-to-let mortgages using the interest coverage ratio, which measures gross rental income against mortgage interest payments. Typically, lower-rate taxpayers need rental income to cover the mortgage payment by 125 per cent, while higher-rate taxpayers must achieve 145 per cent. Lenders also stress test mortgages by adding an additional 1 to 2 per cent to rates to ensure the investment remains profitable if rates rise further. A critical consideration is fees: some buy-to-let mortgages carry arrangement fees as high as 10 per cent of the total mortgage amount, which on a £200,000 loan would equal £20,000. Landlords must assess the total cost including both interest rates and fees rather than rate alone.
For landlords to access the cheapest deals, they typically need to provide at least a 40 per cent deposit when purchasing or hold at least 40 per cent equity when remortgaging. Many will benefit from using whole-of-market mortgage brokers to find cheaper rates depending on their equity position. The tight margins facing landlords mean rents must rise substantially to maintain profitability alongside higher taxes, regulatory compliance costs and elevated mortgage payments.
For buy-to-let investors in the UK, higher mortgage rates combined with the 4 per cent tax surcharge on rental income from April means substantially lower profits unless rents rise significantly or they secure below-average mortgage rates through specialist brokers.