Landlords pay millions of dollars in mortgage debts to reduce interest costs

In an effort to lower their interest rates, landlords are settling mortgage debt worth millions of pounds.

New analysis shows that buy-to-let landlords have been paying down their mortgages for the past nine-months in an effort to minimize the impact of higher borrowing rates .

Many landlords will face higher monthly payments once their fixed rate deals expire.

Moneyfacts reports that the current average rate of a buy-to let mortgage with a fixed rate of two years is 6.28pc. This is almost double the rate at which the same mortgage was offered in October 2021, when it was 2.92pc.

The cost of a typical buy-to let loan for £150,000 with interest only has increased from £4,380 up to £9,420.

UK Finance data shows that between February and August of this year, the volume of outstanding buy to let debt decreased by £1.2bn.

According to an analysis by Hamptons, 69pc of the debt reduction was due to landlords who sold properties and 31pc to investors who buy-to-let.

This marks a significant shift, as the outstanding buy-to let debt has been steadily increasing since UK Finance began recording data in 2013 It grew 84pc over the decade to reach £305bn in February 2023.

Jack Tutton, Director at SJ Mortgages said that he met a landlord recently who wanted to reduce his mortgage liability by six figures.

He said: “They will save a lot of money on their mortgage, given the new interest rate.”

Mr Tutton stated that the trend is more prevalent among landlords with a portfolio buy-to-let than it is for individual landlords.

He added that “another option landlords consider is restructuring their portfolio so as to bring the Loan to Value (LTV), of the portfolio, to an equal level. This will prevent them from being heavily geared on certain properties and low on others.”

Separate data released by UK Finance shows that landlords are reducing their loan sizes in response to rising interest rates.

The share of buy to let mortgages with high LTVs shrank significantly between the spring of 2021 and the beginning of 2021, whereas the share with low LTVs grew.

Buy-to-let loan shares with LTVs between 70% and 80% dropped from 17,8pc down to 15,1pc. Those with LTVs less than 40% increased from 15,4pc up to 19,4pc.

It is possible that landlords have paid down a portion of their biggest loans or sold properties with high debt costs.

Angus Stewart said, “The main issue is affordability.” This is the biggest challenge for everyone.

Mr Stewart said that landlords are paying off their debt because otherwise they would fail the stress test if they wanted to refinance with another lender.

Investors are stress-tested by lenders based on their rental income and mortgage interest payment ratio.

Mr Stewart stated: “Affordability regulations are making it more difficult for those who wish to remortgage their 75pc buy-to let loan, unless they increase the rent. This is the crunch.

Gavin Richardson is the managing director of Mortgages for Business a buy to let broker. He said that some investors also increase the size their deposit when they purchase for similar reasons.

He said: “We see cases where people add an extra £5,000 to £10,000 in order to get a better deal and make the deal work.”