But rates remain lower compared to last year
Buy-to-let mortgage rates have edged up since the Autumn Budget, but landlords are still benefiting from lower rates compared to last year, analysis by specialist lender Octane Capital has revealed.
BTL mortgage rates for two-year fixed deals at 75% loan-to-value (LTV) were declining in the months leading up to the Autumn Budget in October 2024, dropping from an average of 4.83% in March to 4.22% in October. Rates ticked up slightly to 4.28% in November before easing to 4.26% in December.
The December figure, though slightly higher than October’s, was still significantly lower than December 2023, when the average BTL mortgage rate stood at 5.40%. For the whole of 2024, the average BTL mortgage rate was 4.53%, down from 5.47% in 2023.
The decline in rates was driven by a drop in swap rates, which influence lender funding costs. Over 2024, the average one-year swap rate was 4.81%, compared to 5.25% in 2023, while the five-year swap rate averaged 4.16%, down from 4.52%.
However, the recent surge in gilt yields is putting upward pressure on mortgage rates. Analysts anticipate further increases in early 2025, though they expect the trend to reverse if the Bank of England opts to cut interest rates again.
“Since the Budget, we’ve seen swap rates creep up and this has inevitably caused buy-to-let mortgage rates to follow suit,” said Jonathan Samuels (pictured), chief executive of Octane Capital, adding that some lenders are currently absorbing some of the increased costs by reducing their profit margins, hoping for a future drop in funding costs.
“The good news is that both swap rates and buy-to-let mortgage rates remain far more palatable than they were a year ago,” he said.
However, Samuels cautioned that if swap rates remain elevated for an extended period, lenders may eventually pass on higher funding costs to borrowers.
He also addressed the potential impact on the Bank of England’s base rate. He suggested that rising mortgage rates could create economic headwinds, deterring the central bank from further rate hikes.
“If mortgage rates increase, it will push up inflation, but it will also weaken the economy,” Samuels said. “The Bank of England may be reluctant to put more stress into the economy by hiking rates, especially as growth is so limited.”
For investors, Samuels advised considering variable rate mortgages linked to the base rate, which may appear more attractive compared to fixed rates influenced by rising swap costs.
“This is where investors should look when assessing their options for the year ahead,” he added.
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