Buy-to-let mortgage rates at two-year low

Despite the positive signs in the buy-to-let mortgage market, many landlords are concerned about how the Autumn Budget could affect their tax responsibilities.

Average fixed rates on buy-to-let mortgage deals have fallen to their lowest levels since the start of September 2022, according to analysis by Moneyfactscompare.co.uk.

The average two- and five-year fixed rates both fell month-on-month to stand at 5.24% in October, considerably lower than the average rates of 6.40% (two-year) and 6.32% (five-year) of one year ago.

In further encouraging news for anyone planning to take out a buy-to-let mortgage, the number of fixed and variable deals available is now at its highest level since June 2022.

Borrowers had 3,277 deals to choose from at the start of October, compared to 2,581 in October 2023 and just 988 in 2022.

“These are positive signs for prospective landlords, but there are numerous other factors to consider before taking the leap into the buy-to-let sector, not just the cost of a mortgage,” commented Rachel Springall, Finance Expert at Moneyfactscompare.co.uk.

For example, as well as mortgage costs, landlords need to think about the maintenance of the property, the cost of finding (and keeping) tenants, the different types of landlord insurance they may have to get and the legal requirements they need to meet.

But the issue that is likely to be at the front of most landlords’ minds is taxation, particularly with the possibility of future tax changes in the upcoming Autumn Budget.

Although this means that landlords may find their margin of profit is smaller than they may have hoped, Springall points out that “property is still regarded as a safe long-term investment”.

Tougher on taxes

Buy-to-let landlords have suffered from a range of tax changes in recent years, which means many have faced increased costs.

For example, since April 2020, private landlords haven’t been able to deduct their mortgage interest from their rental income. Instead, they now receive a tax credit of 20% of their mortgage interest.

While this hasn’t had much impact on basic-rate taxpayer landlords, it means that higher-rate and additional-rate taxpayers now have to pay more tax than they did previously.

Because these changes only affected private landlords, many individuals have set up limited companies to manage their buy-to-let properties. Limited companies can still deduct mortgage interest from their income and pay corporation tax instead of income tax, which may be a more beneficial arrangement for some landlords.

For example, 5,312 limited companies were set up in September 2024 for buy-to-let purposes, a 28% increase on any previous September, while 70% of new buy-to-let purchases were made via a limited company, according to data from Hamptons estate agents.

All eyes on the Budget

With rumours swirling about what will be announced in Wednesday’s Autumn Budget, buy-to-let landlords may be nervous about how any changes may affect them.

Many expect Chancellor of the Exchequer, Rachel Reeves, to increase the rate of Capital Gains Tax (CGT), which could prompt some buy-to-let landlords to reassess their property portfolio.

Because landlords are dealing with many financial pressures that eat into their profits, an announcement of an increase to Capital Gains Tax could persuade some to cut their losses and sell up sooner rather than later. They may try to sell their properties quickly before any rate hikes come into effect to avoid paying a higher rate of tax.

“Landlords will be on tenterhooks to see how the upcoming Budget will play out and lenders may remain fluid with their fixed rate pricing over the next few weeks, particularly due to volatility surrounding swap rates,” Springall explained.

With the potential unpredictability in the mortgage market, alongside concerns surrounding tax and the Budget, landlords may be unsure about the best course of action to take.

Anyone who needs further guidance should seek independent advice if they need extra support or help in finding the best buy-to-let mortgage deal.

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