Buy-to-let mortgage rates tumble as tax relief cull approaches

Year-on-year the average rates being charged on two and five-year fixed rate buy-to-let mortgages have tumbled by more than a quarter of a percent, according to Moneyfacts.co.uk.

It said lenders had cut rates on both short-term and long-term deals by around 0.30% which would be encouraging for borrowers looking to switch deals.

But it is also welcome as it comes just weeks before the demise of mortgage interest tax relief. The tax break, which allowed landlords to deduct mortgage expenses from rental income, has been gradually phased out over the last three years. When it ends completely in April, landlords could face larger tax bills and less income.

Rachel Springall, a finance expert at Moneyfacts.co.uk, said: “This shake-up may deter potential landlords who feel their profit margins will be tightened, but despite this, optimism for 2020 appears resilient and lenders are clearly working hard to entice prospective borrowers.

“However, it is hard to tell whether this will wane as the year progresses.”

It its report Moneyfacts referred to research by Paragon Bank which found one in five brokers were expecting to introduce more buy-to-let business in 2020.

What’s more, it found 61% of buy-to-let landlords had obtained a new deal by remortgaging during the last quarter of 2019 to secure a better rate.

How could rate cuts impact your profits?

Moneyfacts’ calculations revealed a landlord with a five-year fixed rate mortgage in 2015 who was looking to refinance could benefit from average rate falls of 1.19%.

This, explained Springall, would equate to the difference of £1,947 a year in monthly repayments if the landlord were to take a loan of £250,000 on a 25-year term.

Since the tax relief cull applies to private landlords, buy-to-let investors could also boost profits by setting themselves up as a limited company.

Springall added, anyone considering this route would need to consider any stamp duty costs and the associated taxes for a business, such as corporation tax on profits.

“Whatever existing landlords or new investors decide, it could be an easier process to find the right deal by seeking independent advice and to closely monitor the market for any significant changes,” she added.

For more information about mortgage interest tax relief changes and other rules coming into force this year, click here to see our new guide on the changes.

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