Lenders slash buy-to-let rates as tax and regulatory changes lead to a drop in demand from landlords
- The average two-year fixed rate buy-to-let mortgage rate has dropped to 2.9%
- Drop in demand is forcing lenders to price their rates more aggressively
- Five-year fixed rates are likely to be most popular for landlords
By Will Kirkman For Thisismoney.co.uk
Published: 03:12 EDT, 9 October 2018 | Updated: 03:12 EDT, 9 October 2018
Lenders are slashing their buy-to-let rates in an attempt to lure in new business as tax changes continue to force landlords out of the market.
Average rates in the buy-to-let sector have dropped significantly since changes were originally introduced in 2015 – indicating how keen lenders are to get new business onto their books as demand drops.
The average two-year fixed rate buy-to-let mortgage rate has dropped from 3.09 per cent two years ago to 2.90 today.
And the average five-year fixed rate has fallen from 3.77 per cent two years ago to 3.40 per cent in October this year, according to Moneyfacts.
Buy-to-let rates have fluctuated since 2015, now standing 0.19% cheaper than two years ago
Charlotte Nelson, mortgage expert at Moneyfacts, said: 'The buy-to-let market has had a tough time of late with multiple changes that have required both landlords and providers to rethink their options.'
What are the best buy-to-let deals out there?
Top of the two-year fixed rate table is Sainsbury’s Bank with a 1.40 per cent interest rate at 60 per cent loan-to-value and a £1,745 fee. Second place belongs to Leeds Building Society, with a 1.44 per cent rate and a £2,499 fee at 60 per cent loan-to-value.
For the more popular five-year fixed rate deals, The Mortgage Works is offering a 1.99 per cent interest rate with a £2,335 scheme fee, for 50 per cent loan-to-value.
Virgin Money also has a five-year fixed rate at 2.13 per cent with a £1,695 with a maximum loan-to-value of 50 per cent.
Why is demand for buy-to-let dropping?
The sector has been battered in recent years, with a series of tax and regulatory changes prompting landlords to sell up at a rate of nearly 4,000 homes a month.
It means it is now far more expensive to both buy and run buy-to-let properties than it was two years ago.
The drop in demand has come as tax relief on mortgage interest is withdrawn and replaced with a tax credit, and landlords now pay tax on their revenue rather than profit after mortgage costs.
In addition, the buy-to-let market has been hurt as stamp duty for new purchases was slapped with a 3 per cent surcharge back in 2016, making outlays for new investors considerably more expensive.
Source: Ministry of Housing, Communities and Local Government
In June official figures confirmed that landlords are offloading 3,800 properties a month leading to the first drop in the number of homes available to rent in 18 years.
And according to most recent figures from figures from trade body UK Finance, in July there were just 5,500 new buy-to-let home purchase mortgages completed in the month, some 14.1 per cent fewer than in the same month a year earlier.
Nelson said: 'There has been a lot of upheaval for landlords and many have started to take a step back. As a result providers are now competing for a smaller pool of customers and have to compete heavily on price to win them.
'Five-year fixed rates are likely to be a popular choice among landlords, as the stress-test that is applied for two-year fixed rates does not apply to the five-year deals.
In June official figures confirmed that landlords are offloading 3,800 properties a month
'This could well be one of the reasons why buy-to-let lenders have focused competition within this market and causing the five-year fixed rate to fall ever lower.'
Remortgaging has skyrocketed
WHY IS BUY-TO-LET LESS PROFITABLE?
Former Chancellor George Osborne first announced a tax raid on buy-to-let in 2015, stating the move was designed to support home ownership amid claims that landlords were scooping up properties and making it harder for hopeful first-time buyers to compete.
Intending to put a stop to this, the Government slapped a three per cent surcharge on stamp duty payable on new buy-to-let purchases from April 2016. This trebled the tax bill compared to residential property in some cases.
A further change arrived in April last year, as landlords began to lose their tax relief under a rule known as Section 24, which also forces them to pay tax on their rental income rather than just on their profit after mortgage costs.
Furthermore, the Bank of England also clamped down on mortgage lenders, forcing them to require landlords to earn a much higher ratio of rental income compared to their mortgage payments.
In October last year, further rules were brought in for landlords with four or more mortgaged properties to ensure their debt levels are not too high.
It's not just new landlords that lenders are trying to tempt with low rates, but also the increasing number looking to remortgage.
There were 14,700 new buy-to-let remortgages completed in July, some 7.3 per cent more than in the same month a year earlier, according to UK Finance.
By value this was £2.4billion of lending in the month, 9.1 per cent more year-on-year.
This is in stark contrast to the 14.1 per cent year-on-year drop in the number of landlords that were purchasing new properties in the same month.
David Hollingworth, of mortgage broker London and Country, said: 'The buy-to-let market remains extremely competitive and remortgage looks set to remain a key focus for lenders.
'Not only is a large part of buy-to-let mortgage activity currently driven by those looking to review their deal but some lenders will also be eyeing the end of year and remortgage can be a good way to get more business on the books before the end of the year.
'However, that does require pricing to be attractive in order to bring in the business and with a more limited number of buy-to-let purchases lenders will have to price sharply to maintain their position.
'That can offer landlords a good opportunity to keep their mortgage costs down, something that's all the more important in managing the higher tax bill on the way in light of the reducing amount of higher rate tax relief available.'
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