Mortgage rates have fallen despite the Bank of England raising the Bank Rate just over a week ago, as experts said a "fierce price war" had broken out between lenders.
Policymakers on Threadneedle Street increased the Bank Rate by 0.5 percentage points to 4% recently, immediately raising the cost of borrowing for households on variable and tracker mortgages. But borrowers searching for fixed-rate mortgages have seen costs fall thanks to an escalating price war between banks and building societies competing for new business.
The average two-year fixed-rate mortgage has dropped from 5.44%to 5.43% since Thursday, and the average five-year fix has fallen from 5.2% to 5.15%, according to analyst Moneyfacts. Borrowers on tracker deals have not been so lucky. The average two-year tracker rate has jumped from 4.39% to 4.74% since Thursday, according to Moneyfacts. Fixed rates are expected to fall further in the coming weeks – with the best deals forecast to drop below 4% – as competition heats up between banks keen to hit lending targets after a volatile end to 2022.
Tessa Skot, of mortgage broker Better, said: “After a very weak December for lenders, the competition to attract customers is now fierce and that means there are good deals to be had. That competition, coupled with growing confidence that an end is in sight for interest rate rises, is good news for anyone seeking a mortgage or remortgage. Borrowers are in a much stronger position than they have been for some time, but only if they shop around.”
The price war has already knocked thousands of pounds off the cost of borrowing since mortgage rates peaked in November last year. The average two-year fix has fallen from a high of 6.65% to 5.43% today – a saving of £153 in monthly interest, or £1,836 a year, for a typical borrower with a £150,000 loan.
Craig Fish, of broker Lodestone Mortgages and Protection, said lenders were rescuing fixed rates on a daily basis. Mr Fish said, “When one lender announces a rate reduction, the others tend to follow. The rate war is well and truly on and it's now a race to see who is going to be the first to offer five-year fixed rates below 4%.”
Buy-to-let crisis is a golden opportunity for these landlords
As mortgage costs rise, taxes climb and red tape piles up, thousands of buy-to-let landlords have been throwing in the towel. Many are selling up at a rate not seen in years, sending rents soaring as the market shrinks. Yet for a select group of canny – and rich – investors, market conditions are quickly becoming the best in nearly a decade.
Cash buyers are swooping on the buy-to-let market as rocketing rents and falling house prices bring surging profit margins. Buy-to-let demand has boomed with yields forecast to hit their highest level for nine years – but only those buying mortgage-free can take advantage. “We had a record month in January,” says Tim Coen, of the North Property Group, a buy-to-let specialist. “Our investor transactions were double what they were in December and double what they were the previous January. Rich buyers are piling into the market as rents soar, offering lucrative returns on investment at a time when property prices are falling. Rents are going through the roof, and we are seeing rises of 15% to 25% on renewals, it is just crazy. The rental market is still absolutely on fire. We listed a property [to rent] the other day and we had a queue of people outside our office. Someone paid 12 months’ rent upfront and 10% over asking. On purchase, that property had a yield of 5%. Now, it is 7%.”
Rents across the entire country jumped by 4.2% in December, according to the Office for National Statistics, which was the biggest jump on record. Demand is still wildly out of kilter with supply in every region of the UK, according to the Royal Institution of Chartered Surveyors, and Capital Economics expects rents to continue to accelerate, peaking at growth 5.3% in the middle of this year.
At the same time, the analyst has forecast a 12% peak-to-trough decline in house prices, meaning gross rental yields will rise from a low of 4.3% in mid-2022 to 4.6% in the first three months of this year, says Capital Economics’s Andrew Wishart. He expects gross yields will rise to 5.3% in 2024 – the highest level in nine years.
Investors are taking notice. Rob Jones, of Property Investments UK, a buy-to-let specialist, said, “our inquiries from buy-to-let investors are up 20% compared to last year and are the highest level we have seen for the last five years. Cash buyers who are driving the current uptick in interest as they are untroubled by the rising cost of borrowing. The share of buy-to-let investors purchasing in cash rather than with a mortgage has surged from 40% before the interest rate rises began in 2021 to 70% today."
Meanwhile, landlords with mortgages in their own name are getting hammered. Many are seeing their properties become loss making as they must pay income tax on rents they earn. Historically, they were able to deduct the cost of paying the interest on their mortgage from their rental income for their tax calculation. However, tax changes phased in from 2017 to 2020 mean landlords can now only deduct 20% of their interest costs. As borrowing bills soar and rents struggle to keep pace, many landlords are facing tax bills and mortgage costs that outweigh rental income.
Landlords who own their properties in a company structure are still able to offset their costs and pay corporation tax rather than income tax. But moving properties into this structure is considered both a sale and a purchase in the eyes of the tax man, which means landlords must pay both capital gains tax and stamp duty. Many existing landlords are simply selling up. Those entering the sector now can take advantage of this kind of structure, which has become the default, says Jones, without facing hefty upfront tax charges.
The wave of sales from landlords exiting the market is also presenting bargains to new buyers. In January, 56.4% of all homes sold to investors were bought for less than asking price, according to Hamptons analysis. This was a jump of a quarter compared to last January.
Of those purchasing below the asking price, cash buyers got an average discount of 6.5% – up from 5.9% in December and far higher than the average of 4.5% across all buyer groups. Isaac Odegbami, of Hamptons, says "cash rich buyers have spied an opportunity to pick up bargains and “capitalised on the market uncertainty caused by higher rates. Investors are able to get bigger discounts because they typically target properties that need work and attract less demand from other buyers."
House builders are also increasingly keen to cut deals with buy-to-let investors as overseas demand, falling house prices, and the end of the Help to Buy scheme in March hit sales. Landlords can get discounts of up to 7% off new build properties, Coen says.
However, new investors will not be able to escape the growing regulatory burden. Housing secretary Michael Gove published a white paper last summer outlining plans to scrap Section 21 “no-fault” evictions and make all tenancies open-ended. MPs have warned that the Government risks “overwhelming” the court system and bringing increased delays to the eviction process. A report by the Levelling Up, Housing and Communities Select Committee said that changing the grounds for eviction will “present a real risk that the current systems will be overwhelmed, and there will be a logjam with lengthy delays before verdicts are reached”.
The proposals also pose a particular risk to the student rental sector, in which landlords need to be able to routinely end tenancies in time for the next academic year. The LUHC committee recommended that the Government retain fixed-term tenancies in this sector to prevent a shortage of supply. Ultimately, there are more landlords quitting the sector than joining.
“The number of existing landlords who are leaving means the supply may still recede, but there has certainly been a renaissance in cash buy-to-let investors, and the environment is much better for those investors coming in. The fact that the rental market is shrinking is in fact good news for the new landlords entering the market. Tenant demand remains extreme, which should keep rents buoyant. Properties that would have normally had void period of a month or two are now empty for only a week,” says Jones.
For those who can afford it, now is the time to get into buy-to-let!