Interest rates are much more than numbers on a page. They set the benchmark and determine everything from the monthly repayment amount to how much profit you’ll make from the rent. Interest rates are especially important for buy-to-let mortgages, as most of these types of loans are interest-free.
What are buy-to-let interest rates?
An interest rate is the percentage of a loan amount charged by a lender to the borrower for the use of their money. They are influenced by a variety of factors, with the Bank of England’s base rate a primary driver. Other aspects include market trends, the overall economic climate and each individual lender’s appetite for risk.
In the most straightforward terms, these interest rates represent the cost you incur for borrowing money to purchase a property. The higher the interest rate, the more you’ll end up paying back over the entire term of your mortgage.
A history of interest rates post credit crunch
In 2023, the Bank of England raised the base interest rate to 5%, marking the thirteenth consecutive rate increase since its record low of 0.10% in March 2020. These rate hikes have been primarily in response to double-digit inflation, as the BoE tries to stabilise the economy and keep inflation in check. Borrowing costs are now at levels not seen since 2008 and pre credit crunch.
In 2021, the interest rate increased from 0.1% to 0.25%. Though marginal, it was the first time in 14 years that the Bank of England had increased the interest rate, gearing us up for what was to come.
In March 2020, shortly after the pandemic took hold, the Bank of England (BOE) lowered rates to an all-time low of just 0.1%. Even before that, rates remained competitive since the housing crash in 2008
In August 2016, they fell further to 0.25% before going back up to 0.5% in 2017 and then 0.75% in 2018. Even these rate rises were marginal compared to what came before. The rate of 0.75% was then lowered to 0.1% after the outbreak of Covid and, to some extent, the uncertainty at the time over Brexit.
Pre-crash, in July 2007, interest rates were 5.7%. Fast-forward two years – and one housing market crash – and rates dramatically fell to 0.5% in March 2009. This was the lowest they had been in 300 years, which gives you some idea about the gravity of the crash and the global credit crunch it caused.
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How do interest rates impact my buy-to-let investment?
Interest rates play a significant role in your investment. You may be wondering why these rates hold such importance, and the answer lies in the substantial effect they have on the profitability of your buy-to-let investment.
A lower interest rate typically equates to decreased monthly mortgage payments, which potentially boosts your rental yield. This yield represents the percentage of your property’s value that you receive in rent. At the same time, a high-interest rate could increase your monthly mortgage payments, thereby reducing your rental income and leading to a lower overall profit.
Are interest rates for buy-to-let mortgages higher?
Generally speaking, buy-to-let mortgage rates tend to be slightly higher than residential mortgage rates. The reason for this lies in the perceived risk associated with buy-to-let properties. Lenders often view these investments as riskier due to potential rental void periods when the property may be unoccupied and the possibility that tenants might default on rent.
Moreover, property investors are usually reliant on rental income to meet their mortgage payments – which can fluctuate – adding another layer of risk. Due to these increased risks, lenders often charge a higher interest rate to mitigate potential losses.
How do interest rates impact my buy-to-let mortgage choice?
Choosing the right mortgage for your buy-to-let investment isn’t a one-size-fits-all solution. There are several types you can consider, each with its own features and interest rates.
Fixed-rate mortgages
Fixed-rate mortgages offer a set interest rate for a certain period, typically two to five years, which means your monthly payments stay the same, giving you stability and predictability. If rates go up during this time, your mortgage doesn’t increase. If they go down, however, your mortgage payment won’t increase with the new rate as it’s fixed for the specified period.
Tracker mortgages
Interest rates on a tracker mortgage are tied to the Bank of England’s base rate, moving up and down in tandem. This means your monthly payments can fluctuate, which might suit those who prefer their mortgage to mirror real-time interest rates.
Variable rate mortgages
Unlike tracker mortgages, variable rates aren’t tied to the Bank of England’s base rate. Instead, the interest rate is at the lender’s discretion, so your monthly payments could change at any time. The lender is required to give you a notice of the change. This notice period is often at least 30 days, but it can be longer depending on the specific terms of the mortgage agreement.
Length of the initial term
Longer initial periods typically have higher rates, reflecting the lender’s risk of locking in for an extended timeframe. On the other hand, shorter initial periods usually have lower rates. The difference is usually minimal, but it’s worth considering before agreeing to any buy-to-let mortgage or remortgage deal.
Each type of mortgage comes with its own set of pros and cons, and the interest rates can vary quite a bit. Therefore, it’s worth weighing up your options carefully, considering your financial circumstances, risk tolerance and investment goals.
What’s the best way to compare buy-to-let mortgages to get the best interest rate?
When it comes to comparing buy-to-let mortgage rates, the task might initially seem daunting, but it doesn’t have to be.
A good starting point is to look at the annual percentage rate (APR). The APR doesn’t just account for the interest you’ll pay, but it also includes any compulsory charges you’ll incur. In essence, it reflects the ‘total cost’ of the mortgage and is a useful tool for comparing different mortgage deals.
The cheapest deal isn’t always the best one. You’ll also want to consider the overall package that comes with the mortgage. How flexible is it? What are the rules around overpayments? Are there any early repayment charges to consider?
In short, while the APR provides a good starting point, a thorough comparison should go beyond just the numbers. Consider the full range of features and conditions attached to each mortgage deal before making your decision. After all, a mortgage is a long-term commitment and getting the right deal can make a significant difference to your buy-to-let investment.
How to mitigate the impact of high-interest rates
As of June 2023, interest rates are 4.5%. They’re higher than at any point in the last 15 years, which has caused some financial strain for landlords. Therefore, it’s only normal that you’d want to mitigate the impact of high-interest rates.
There is no definitive answer to solve this, and each situation depends on the borrower’s personal circumstances. For some, setting up a limited company won’t necessarily help with interest rates, but it could lower overall outgoings, especially if you’re a higher-rate taxpayer.
Others might decide to get a tracker mortgage in the hope that rates will reduce soon and their payments come down. All of these solutions come with an element of risk, and you shouldn’t dive into any decision without carefully considering every avenue. It might also be worth getting advice from a mortgage broker.
Getting a buy-to-let mortgage with Molo
At Molo, we keep interest rates competitive with the aim of helping you find the right investment. But what sets us apart is our digital-first approach. We’ve ditched the paperwork for a swift, online process that puts control fully in your hands. Plus, we’re on hand to help, offering real-time updates and personalised support to ensure you’re always in the loop.
Learn more about Molo’s interest rates and buy-to-let products:
Final thoughts: thank you for your interest
Interest rates underpin a buy-to-let mortgage, and you need to have a good grasp on them before choosing a buy-to-let product. When rates are higher, navigating the landscape proves trickier. But that doesn’t mean you can’t still find a suitable mortgage with an interest rate that suits your needs.
Please note that the content provided in this article does not constitute advice. For guidance on the financial aspects of getting a mortgage, it is recommended that you seek the expertise of a financial advisor.
Flexible mortgages rates
See what you could afford to borrow.
Use our buy-to-let calculator
to plan ahead.
