Landlords shift to Interest-Only mortgages as Mortgage Rates Rise
As borrowing costs climb back to levels last seen in late 2023, landlords are being forced to rethink not only how they finance their portfolios, but how they sustain profitability in a more challenging and complex market.
š A Rapid Shift in Mortgage Costs
Recent data highlights just how quickly the landscape has changed. At the start of the year, only a small proportion of buy-to-let mortgages were being agreed at rates of 5% or above. Fast forward to April, and that figure has surged dramatically, signalling a clear return to a higher-rate environment.
This shift is significant. For landlords, even small percentage increases in mortgage rates can translate into substantial rises in monthly costsādirectly impacting yields and overall returns.
š· Interest-Only Mortgages Back in Focus
In response, landlords across the UK are increasingly turning to interest-only mortgage products as a way to manage monthly outgoings.
Today, nearly four in five new buy-to-let purchase mortgages are structured on an interest-only basisāa notable increase since the beginning of the year.
Why the shift?
Quite simply, affordability.
On a typical landlord purchase in April 2026:
- A repayment mortgage averages around Ā£828 per month
- An interest-only mortgage sits closer to Ā£580 per month
Thatās a substantial monthly savingāand currently the widest gap seen since late 2022.
For many landlords, this difference is not just appealingāitās essential.
š° Injecting Cash to Stay Competitive
Another clear trend emerging in the market is the increasing number of landlords choosing to inject additional capital into their portfolios.
Rather than absorbing higher monthly payments, many are opting to reduce their borrowing levels altogether. Around 40% of landlords refinancing onto interest-only deals have paid down a portion of their loan this year.
On average, this equates to:
- A cash injection of roughly Ā£30,000+
- A reduction of mortgage balances by over 18%
This strategy helps bring monthly repayments back to manageable levels and ensures compliance with lender affordability stress testsāan increasingly important factor in todayās market.
ā³ The Rise of Shorter Fixed Deals
Alongside interest-only borrowing, landlords are also showing a clear preference for shorter-term fixed-rate mortgage products.
Two-year fixed deals are now dominating the market, accounting for nearly half of all new landlord lending. This marks a significant shift away from the longer five-year fixes that were previously favoured during periods of low interest rates.
This change reflects a growing sentiment among landlords:
- A desire for flexibility
- Expectations that rates may stabilise or fall in the near future
- A reluctance to lock into higher rates for extended periods
In essence, landlords are positioning themselves to adapt quickly as the market evolves.
š Rental Market Showing Signs of Recovery
While higher borrowing costs have undoubtedly placed pressure on landlords, there is some positive news emerging from the rental sector.
Rental growth, which softened throughout much of the previous year, is now beginning to show signs of recovery.
Across Great Britain:
- Rents on newly let properties have risen modestly year-on-year
- Demand from tenants is increasing at a strong pace
In particular, urban centres such as London are leading the way, with inner-city rental growth rebounding more sharply.
š Demand vs Supply: A Continuing Imbalance
One of the defining features of the current rental market is the ongoing imbalance between supply and demand.
Tenant demand has surged significantly, with a notable increase in the number of renters actively searching for homes. At the same time, the number of available rental properties remains constrained.
Compared to previous years:
- There are fewer homes available to rent than a year ago
- Supply levels remain dramatically lower than pre-pandemic figures
This imbalance continues to underpin rental values and provides some reassurance to landlords navigating higher costs.
š§ A More Strategic Approach to Letting
What we are witnessing is not a retreat from the buy-to-let marketābut rather a transformation.
Landlords are becoming increasingly strategic in their approach, focusing on:
- Maintaining strong rental yields
- Managing debt more proactively
Structuring finance in a way that balances short-term affordability with long-term investment goals
Crucially, lendersā stress testing requirements mean landlords must demonstrate that their investments remain viableāeven under less favourable conditions.
š¤ Our Take as Estate Agents
From an estate agency perspective, this is a market defined by adaptation, not decline.
Yes, higher interest rates have introduced new challenges. However, they have also encouraged a more disciplined and professional approach to property investment.
We are seeing landlords:
- Making more calculated purchasing decisions
- Reassessing portfolio performance
- Taking proactive steps to remain competitive
At the same time, strong tenant demand continues to support the rental sector, ensuring that well-positioned properties remain highly attractive.
š® Looking Ahead
As we move further into 2026, all eyes remain on future decisions from the Bank of England.
Should inflation ease and rates begin to stabilise, we may see:
- Increased confidence among investors
- Greater market activity
- A gradual return to longer-term mortgage products
In the meantime, landlords who remain flexible and financially prepared will be best placed to succeed.
š Final Thoughts
The current market presents a clear message: adaptability is key.
Rising mortgage rates have undoubtedly reshaped the buy-to-let landscape, but they have not removed opportunity. Instead, they have created a more balanced environmentāone where informed decisions and strategic planning are more important than ever.
For landlords willing to adjust their approach, there remains significant potential within the UK property market.
If youāre reviewing your portfolio, considering a new investment, or simply want to understand your options, now is the ideal time to seek expert advice and plan your next move with confidence.