The interest rates attached to buy-to-let mortgages are slightly higher than what you will find on a residential mortgage, so these payments must always be factored into your decision making.
Like all interest rates, these will vary according to the Bank of England base rate as well as your loan to value, personal circumstances and whether you choose a fixed rate or variable rate product.
If you have a larger deposit, experience in operating as a landlord of buy-to-let properties, and a clean credit history, you are likelier to be offered a lower interest rate.
Other factors will also influence buy-to-let mortgage interest rates, including the type of property – Houses of Multiple Occupancy (HMOs) attract higher interest rates – and whether you are taking out an interest-only or repayment mortgage.
What are the latest buy-to-let mortgage rates?
Buy to let mortgage rates fluctuate based on the condition of the national economy, and your personal financial circumstances. Consequently, no one-size-fits-all interest rate is assigned to buy-to-let mortgages.
At the time of writing in early 2023, the average interest rate for a buy-to-let mortgage is around 4% – potentially higher for first-time landlords or anybody else that poses any credit risk to the lender, or very slightly lower for those that pose minimal risk to lenders.
How are buy-to-let mortgage rates decided?
As discussed, the interest rate on a buy-to-let mortgage will depend on a range of factors. These break down as follows.
Bank of England base rate
The Bank of England sets a national base rate on interest for any credit arrangements in the country, including mortgages.
The Bank of England reviews its base rate every six weeks or so, and it can rise or fall according to these discussions.
The highest this interest rate has ever been was 17% in 1979, while the country was experiencing an energy crisis that led to a recession. The lowest the Bank of England base rate has ever dropped was to just 0.1%, from the spring of 2020 to December 2021.
Size of the loan
It stands to reason that a larger loan carries more risk. You will be responsible for higher monthly repayments, potentially over a longer period of time. The higher the loan-to-value ratio of your mortgage, the better your interest rate will be.
Most buy-to-let mortgage lenders will demand a deposit of at least 25% of the property’s total value. You will be invited to lay down a deposit of up to 40%, though – and if you have a really bad credit history, this may be the least a lender will accept.
Risk to the lender
Just like a residential mortgage, the interest rate you are offered on a buy-to-let mortgage will vary according to a risk assessment conducted by the lender. The more comfortable a lender feels that you will be able to keep up with the monthly repayments, the lower the interest rate you will be offered.
In addition to the size of the loan, the following will factor into a lender’s credit risk assessment of your buy-to-let mortgage application. The higher and cleaner your credit score, the lower interest rate you will be offered.
While affordability plays a bigger role in your application than your credit score, and it is potentially possible to achieve a buy-to-let mortgage with bad credit if you meet the rest of the lender’s criteria, any historical issues will be reflected in your interest rate.
The purpose of a buy-to-let mortgage is to own a property that you plan to yield. This means that lenders will want to see a rental yield on your purchase that exceeds the mortgage repayments. If you already have a potential tenant, you are likelier to be offered a superior interest rate.
While rental yield will be considered the primary resource for repaying your buy-to-let mortgage, many lenders will also seek assurance that you have another income source to meet your financial commitments if your tenants withhold rent or move out at short notice.
Experience as a landlord
Most lenders that specialise in buy-to-let mortgages prefer to work with customers that have experience in owning and managing properties. Acting as a landlord is not always easy and can bring a range of unexpected issues, so proving that you have walked this path before will help your application.
Type of mortgage
Buy-to-let mortgages are a broad church, with varying interest rates. Applying for a mortgage for an HMO, for example, will attract a higher interest rate than a standard property that you plan to rent to a single occupant or family.
Equally, you may choose to take out an interest-only buy-to-let mortgage. This will reduce your monthly repayments, as the balance of the mortgage remains untouched and you will only be responsible for meeting interest repayments.
The trade-off here is that an interest-only mortgage is typically for a short period – maybe as little as two years – and you will need to settle your outstanding balance at the end of this term. The interest rate you pay will also be higher, though you can deduct 20% of your rental yield from your income tax return.
Fixed and variable rates explained
Another decision you will potentially need to make when taking out a buy-to-let mortgage is whether to take out a fixed or variable rate. The fundamental difference between these two interest rates is:
- Fixed rates mean you will pay the same in interest for a set period, usually between two and five years. This means that, whatever happens to the Bank of England base rate, you will never pay more or less interest than what you have contractually agreed with your lender.
- Variable rates, as the name suggests, can change at any time. If the Bank of England base rate spikes sharply, your monthly repayments will increase in line with this. However, if the national economic picture improves and the base rate drops, you may pay less on a monthly basis.
As a rule, fixed interest rates on a buy-to-let will be slightly higher than variable rates. This is so the lender has a measure of protection if the Bank of England increases its base rate, which could leave a mortgage provider out of pocket.
Is it a good idea to choose a fixed rate?
This depends on your financial status, and how much you are willing to gamble on factors that remain outside your control. Always be aware that, should the Bank of England base rate drop, you will likely be paying more in interest than the national average.
Fixed rate mortgages also tie you into a contract for the duration of the term, so if you wish to pay off your loan and exit your agreement early, you will need to pay a penalty. This will usually be between 1–2% of the outstanding value of the loan, depending on how much time is left on the agreement.
However, you may value consistency above potential savings. If you take out a fixed rate buy-to-let mortgage, you will know exactly how much you need to repay every month – and charge an appropriate rental sum to cover this.
While repayments on a variable rate mortgage could lead to lower repayments, they can also rise without warning. If you feel that you will sleep better at night knowing exactly how much money you need to meet your financial commitments, a fixed rate buy-to-let mortgage is the best choice.
How can I get a lower buy-to-let mortgage rate?
The best deals on interest rates for buy-to-let mortgages are usually reserved for low loan-to-value (LTV) applications. This means that the more money you can lay down as a deposit, the more appealing your interest rate is likely to be.
Beyond a higher deposit – laying down 40% of the property value, meaning that you are requesting a mortgage at a 60% LTV – ways to attract a lower interest rate on your buy-to-let mortgage include:
- Minimising your personal debt and other financial commitments, thus improving your credit score.
- Presenting a business plan that demonstrates the rental yield you expect to bring in, ideally with an agreement in principle to house tenants.
- Demonstrating how you will meet your repayment commitments if the property is unoccupied for any period.
- Proving that you have experience in managing property and managing the needs and complaints of tenants, as well as maintaining minimum legal standards on the condition of the building.
- Showcasing trends for property sales in the area that you are buying in, reassuring the lender that you will be able to sell the property for a profit and repay an interest-only mortgage at the conclusion of a term.
Keep reading – Compare buy to let mortgages
Why are the interest rates on buy-to-let mortgages higher than on residential mortgages?
Most buy-to-let mortgages are at least one percentage point higher than an equivalent residential mortgage, also known as an owner-occupier mortgage. This reflects the slightly higher risk to the lender.
If you are relying on rental yield to maintain your mortgage repayments, you are relying on a third party keeping up their end of the financial contract – something neither you nor the lender can control. Tenants could fail to pay rent for up to a year before you are able to take any legal action against them.
In addition, owner-occupiers have a vested interest in maintaining the upkeep of a property, thus protecting the lender’s investment, as they need to live within. If you are unlucky enough to bring unscrupulous tenants into your property that cause damage, the value of the investment will suffer.
Keep reading – buy to let mortgage calculator
What fees will I pay on my buy-to-let mortgage?
While interest rates will always play a significant role in the costs of your buy-to-let mortgage, interest is not the only fee that you will be responsible for.
Additional expenses will be accrued throughout the application process, and likely be added to the sum total of your agreement. These include:
Lender arrangement fee
A great deal of administration will be involved in the application process for a buy-to-let mortgage, and lenders will not conduct this work free of charge.
A lender arrangement fee will be added to your loan, which could be up to 3% of the total sum borrowed. This is another compelling argument for laying down a larger deposit on the property.
Some products come with low lender arrangement fees, although this may well be offset by a higher interest rate.
To get the best deal on a buy-to-let mortgage, it’s advisable to seek the services of a mortgage broker. These professionals will potentially unlock interest rates from specialist lenders that are not available to the general public, or use existing business relationships to gain access to a better interest rate.
Any lender that agrees to a buy-to-let mortgage is making an investment, and will thus seek assurance that the valuation of the property is sound.
Some lenders will take the word of an estate agent that a property is valued appropriately, but many will arrange an independent valuation of their own – especially for a substantial loan. This will likely cost at least £200–300, and can be significantly more for more valuable properties.
Unless you are remortgaging a property that you already own, you will need to undertake the conveyancing process through a third-party solicitor when taking out a buy-to-let mortgage. This will usually cost between £1,000–2,000, depending on the complexity of the purchase. All solicitors have a unique rate card, so it’s worth shopping around to get the best deal possible, though also ensure that your chosen solicitor has a reputation for acting thoroughly and swiftly. It’s easy to get bogged down in administration, and you may face a frustrating wait to complete your transaction if your conveyancer does not move at speed.