"If base rates are held, or even come down, lenders with variable rates linked to the base rate will likely look even cheaper compared to those fixed rates being priced off an increased swap rate and this is where investors should look when assessing their options for the year ahead"
- Jonathan Samuels - Octane Capital
CEO of Octane Capital, Jonathan Samuels, believes that despite soaring gilt yields, the lending landscape remains a favourable one for UK landlords, as whilst BTL mortgage rates have crept up since the Autumn Budget, they remain considerably lower on an annual basis.
The analysis shows that in the run-up to the Autumn Budget in October of last year, the average mortgage rate for a two-year fixed-rate buy-to-let mortgage (75% LTV) had been falling, down from 4.83% in March of last year to 4.22% in October.
In the month that followed this increased to 4.28%, before reducing to 4.26% in December, albeit still marginally higher than the October figure.
However, the average rate of 4.26% seen in December of last year was still considerably lower than the previous year when it sat at 5.40% (December 2023).
In fact, the analysis by Octane shows that on average in 2024, the average buy-to-let mortgage rate was 4.53%. This is compared to an average rate of 5.47% seen over the course of the previous year (2023).
This reduction in buy-to-let mortgage rates has been driven by the swap rate market.
Throughout 2024, the average one-year swap rate sat at 4.81%, down from 5.25% in 2023. At the same time, the average five-year swap rate came in at 4.16%, down from 4.52% in 2023.
However, with soaring gilt yields, mortgage rates are expected to climb during the initial stages of 2025, although the wider expectation is that the increase in gilt yields currently being seen should subside if the Bank of England decides 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," explained Jonathan.
"This is due to the fact that many lenders in this market rely on swaps to lend at fixed rates, and the funding lines are priced in relation to swap prices. So whilst the base rate has not moved, the funding cost to lenders has gone up," he said.
"The good news is that both swap rates and buy-to-let mortgage rates remain far more palatable than they were a year ago and so, at present, many lenders are opting to take the hit on the margin in hopes of a future reduction. As a result, there remains a good level of opportunity for buy-to-let investors to secure a mortgage at a lower rate than they would have a year or so ago.
However, he added, "The longer this goes on, the more likely they are to pass on this increased cost to borrowers via higher mortgage rates.
"Does this mean that the base rate will go up? Not necessarily. If mortgage rates increase it will push up inflation, but it will also weaken the economy. The Bank of England may be reluctant to put more stress on the economy by hiking rates, especially as growth is so limited, as this could actually push the UK into a recession unintentionally.
"So, if base rates are held, or even come down, lenders with variable rates linked to the base rate will likely look even cheaper compared to those fixed rates being priced off an increased swap rate and this is where investors should look when assessing their options for the year ahead,” he concluded.
