Monthly interest costs have surged by 283% since 2021 for landlords using interest-only mortgages

Monthly interest costs have surged by 283% since 2021 for landlords using interest-only mortgages, highlighting the dramatic effects of rising interest rates, while those making a full monthly repayment have seen the monthly cost of their mortgage climb by 71%.

The research, from specialist property lending experts, Octane Capital, compared the latest rates available (October 2023) for a 75% LTV two-year fixed rate buy-to-let mortgage and how these rates have changed on an annual basis over the last decade.

The research shows that the average B2L mortgage rate available had been in steady decline due to the base rate remaining at historic lows since 2009. In fact, it fell from 5.06% in October 2012 to a low of 1.65% in October 2021, just before interest rates started to climb in December 2021.

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As a result, the average monthly mortgage payments on a B2L mortgage was significantly lower than they are today. Landlords making a full monthly repayment were paying an average of £804 per month, while those making interest only payments were paying just £272 per month.

Interest rate shifts

Since 2021, buy-to-let mortgage rates have soared from an average of just 1.65% in October 2021 to 5.72% in October 2023. Meanwhile property prices have risen between the two periods, from £363,333 in 2021 to £291,385 in 2023, making things even pricier for new investors.

As a result, the average landlord is now paying £1,371 per month when making a full monthly repayment, an increase of 71% versus October 2021. However, those opting to make interest only payments on their mortgage have seen a far steeper hike in costs, climbing to £1,042 per month – an increase of 284%.

One silver lining for mortgage holders is the cost of two-year fixed rates have started coming down again, as they fell slightly from 5.87% to 5.72% between October 2022 and October 2023.

CEO of Octane Capital, Jonathan Samuels, said, “It’s been a challenging year for the nation’s landlords, as mortgage repayments have dramatically eaten into their profit margins, margins that have already been reduced due to a string of legislative changes from the government in recent years.

Those who opt to pay an interest only payment have seen a particularly large jump in the monthly cost of their mortgage and so it’s no wonder many landlords are dubious about their future in the sector and the profitability of their portfolio.

One positive is that buy-to-let rates now seem to be on the slide, after increasing rapidly between 2021 and 2022. With the Bank of England holding the base rate since August, it seems that trend could continue as we move into 2024.”