Interest Rates and the Buy-To-Let Market in 2025

We’re writing this on the 8th May 2025 – The 80th Anniversary of VE day. The official ceremonies included a two-minute silence at 12:00 noon.

This was immediately followed by the announcement that the BoE had reduced their base rate from 4.5% to 4.25%. This wasn’t part of the celebration and there was no connection between the two, other than an accident of timing.

Moreover, the Governor of the Bank hinted that despite forecasts of a spike in inflation, more cuts in the base rate were expected.

There are many aspects of the buy-to-let market which command the attention of landlords and property investors, however there are few which can beat interest rates for their ability to cheer or depress.

For many involved in the private rented sector, mortgages and other financial instruments play a critical role, and getting the best possible deal can make the difference between profitability or panic.

With many years of involvement in property investment, we’re aware just how important interest rates are to the sector, so we’re going to take a look at them – what are they, why do they fluctuate and what, if anything, can you do about them.

Interest rates – a primer

So, who sets interest rates, and how are they set? Are they driven by political considerations or are they purely the result of economic factors?

If you live in the UK, one of the best places to start is with the Bank of England (BoE), who are responsible for setting the base (interest) rate in the UK. The BoE is independent of political interference although the government sets some targets.

Oddly, and we’re not going to get into the politics of this too much, it is still owned by the UK Government – it’s the UK’s central bank after all. The base rate, which the Bank’s Monetary Policy Committee sets, underpins the rates elsewhere in the UK.

The graph below tracks the changes to the Banks’ base rate since 2020.

That out of the way, interest is the cost of borrowing money, expressed as a percentage of the amount borrowed; borrow £1000 at 5% and you’ll pay back a total of £1050. Simple; however interest calculations aren’t always simple.

At this point we’ll smoothly step aside from a discussion of how interest rates are calculated, because we’re not mathematicians, and life’s too short.

From our perspective how interest rates affect the buy-to-let market is more important than how those rates are arrived at. We will, as we go through this, make mention of the broader factors which can affect rates, both up and down.

Interest rates and the buy-to-let market

If you are fortunate to be able to entirely finance your property investments from cash reserves, congratulations! Not many landlords or investors are in this position, and therefore to realise their ambitions, they must borrow.

Where they borrow, and what that borrowing costs them is crucial to the wellbeing of their investment journey. Many factors affect the rate you’ll ultimately pay on a loan, again the BoE has some useful information.

Low interest rates

Fundamentally, low interest rates are good for the buy-to-let market as it makes borrowing to finance investment more affordable. Landlords’ costs are reduced as their borrowing is cheaper, yields are increased as a result.

Lower Interest rates will encourage more investors to purchase property; more properties result in greater choice for tenants. An increase in available rental properties is a major positive for tenants seeking accommodation.

Alternatively landlords could choose to use the additional money to improve the quality of their properties, which has a direct benefit for their tenants.

However, the lower rates landlords enjoy are not exclusively theirs, and they’ll be present in the products aimed at domestic buyers too. As a result, landlords may find themselves competing for properties when buying on the open market.

Competition tends to drive prices up, and lower interest rates mean that the resulting borrowing is more affordable. Therefore investors may find themselves facing an overheating property market, reducing the savings they can make.

Landlords do have an option not available to residential owners, that is to sell or buy properties with tenants in situ. We’ve covered this in our article “The Benefits of Selling Tenanted vs Vacant Property”.

High interest rates

Higher interest rates tend to suppress demand, and can dramatically increase the cost of borrowing. As you’d expect, this cuts into profits and affordability, potentially raising rents and suppressing demand.

Once again, increased rates affect the whole market, not just the buy-to-let sector, which may mean that investment properties can be bought at better prices as overall demand is squeezed.

In this case, landlords may also see an increased demand for rental properties as potential buyers decide to wait out the market, either saving for a larger deposit or hoping for a fall in interest rates.

For investors, provided that interest rates aren’t ridiculously high, the combination of lower property prices, reduced demand on the open market and a slow down in residential buying may make these conditions an ideal opportunity to expand.

Buy-to-let mortgages

There is no shortage of buy-to-let mortgages, from all the major lenders. They differ from domestic mortgages in a number of ways, principally being based on a  lower loan to value (LTV) basis.

Typically expect to see LTVs of around 75%, some are as low as 60% LTV. Eligibility will vary, with lenders looking for rental incomes which comfortably exceed the monthly repayment – 125% being not uncommon.

Rates are also variable, as you’d expect. Currently the fixed-rate period is being offered at circa 4.7%, with periods from 2 – 5 years, with the rate then either reverting to a tracker rate, or fixed rates of around 6% – 7% quite common.

Arrangement fees are high compared to residential mortgages and while it is possible to find options with lower fees, you’ll often find that these are offset by higher interest rates.

Advice from the property pros

Borrowing to finance investment is the norm for most investors and landlords, therefore interest rates are either a source of joy or panic depending on how the market and economy are performing.

Lenders are much more rigorous about stress-testing BTL borrowers ability to repay, which is all to the good, however unexpected events such as the Truss mini-budget can cause sudden turmoil. Not everything can be planned for.

The relationship between interest rates and buy-to-let is complicated, as we alluded to previously. It’s been a long time since we saw double-digit base rates, and hopefully it’ll be a longer time before we see them again.

Leaving aside the unpredictable, rates in the UK are reasonably stable so you should be able to calculate the cost to you of borrowing to finance acquisitions. Like any business, doing these calculations early and carefully is key to success.

Even if interest rates have risen, a careful canvassing of the rental market should give you a clear indication of whether or not, despite higher costs, you’ll be rewarded by your investment.

Remember that for many smaller landlords, it’s not just about income, but about capital appreciation over the years, indeed some landlords are satisfied if their investment pays its own way, counting on higher property prices in the future.

In summary…

While interest rates are important, they are only one factor to be considered when making investment decisions.

The state of the rental market, how active the property market is, projections of capital growth for any given property and more all need to be added to the mix.

Now, we’re not mortgage brokers but we understand the dynamics of the buy-to-let market well, and we would be more than happy to sit down and discuss all aspects of property investment and the buy-to-let market.

There are plenty of suitable mortgages out there for buy-to-let investors, and if you need recommendations we can point you towards brokers who we know and trust.

Thanks for reading and please get in touch if you’d like to discuss interest rates or any aspect of this vibrant investment market.

Written by Ross MacDonald, Director of Sales & Cofounder of Portolio

Get in touch on 07388 361 564 or email to [email protected]