The questions you must ask before signing that buy-to-let mortgage deal
“To fix longer or not to fix longer? That is the question.” Paraphrasing William Shakespeare, I am, of course, talking about buy-to-let mortgages. If you are a buy-to-let landlord considering (or needing) to remortgage this year, it’s a question that you will be asking yourself. Traditionally, the two-year fix has been the way to go when financing buy-to-let investment. However, in an environment where even the Bank of England has conceded it may raise rates sooner and faster than previously expected, might you be wiser to fix for five years?
Mortgage rates were falling last year. Why?
In November 2017, the Bank of England increased the base rate for the first time since July 2007 (when it raised rates from 5.5% to 5.75%). This took base rates up to 0.5%. Usually, banks and lenders are quick off the mark to follow suit on credit products, including mortgages. However, buy-to-let mortgage rates ended 2017 without rising. Many investors have asked me why.
The simple reason is that:
- The buy-to-let mortgage market was weak
- Lenders needed to remain competitive to hit lending targets
The strategy that most lenders took to leap these hurdles was to absorb the extra cost of borrowing themselves. They chose not to pass on higher rates, and instead ate the cost via squeezed margins. Many lenders even started to waive arrangement fees in their rush to secure business before the year-end.
Buy-to-let mortgage interest rates are now rising
As the old year closed out, the new year has ushered in a new strategy from lenders. They now have several months to hit their lending targets, many of which will have been reduced. This means they don’t have to be quite so competitive. They are more able and willing, to raise rates. Some have started to reintroduce those fees they so kindly removed at the back end of 2017.
According to Mortgage Brain, lenders are increasing rates on buy-to-let mortgages. But they aren’t doing so evenly. Whether it is the possibility that Brexit will slow the economy (once it happens), or some other factor, two-year fixed rates are rising while five-year fixed rates are falling. It found that:
- The average cost of a two-year fixed rate deal with a 60% or 70% loan-to-value (LTV) is now 2% more than it was in November 2017
- The average five-year fixed rate buy-to-let mortgage, on 70% LTV, now costs 2% less than it did three months ago
The difference could save you hundreds or even thousands of pounds over the life of the mortgage.
So, should you switch to a longer fixed rate term?
Unfortunately, the decision to switch to a longer fixed rate term is never as easy as examining the headline numbers. Whether to do so depends on many factors. If you are considering remortgaging or your current deal is nearing its expiry date, you might be wise to consider financing using a longer fixed rate deal. When doing so, you should consider these three questions:
- Do you expect to hold your property for more than five years?
- Do you have penalties for early repayment of your current mortgage?
- Have you structured your property investment to maximise mortgage interest rate tax relief?
Always use a mortgage broker with experience and expertise in the buy-to-let mortgage market. Right now, it may be wise to consider a five-year fix, and you should ensure you ask about fee-free products while they are still available. And make sure you know the terms of your current mortgage arrangements.
A word of warning when remortgaging
A friend of mine recently decided to move. He had seen a property that suited his lifestyle, family, and business better. He forgot that he had remortgaged his existing home less than six months ago on a two-year fixed rate term. Having had an offer accepted for his new home, and with a new mortgage with a new provider in place, he was all set to pull the trigger. Then his current mortgage lender sent him a demand for £6,000 in costs to repay his mortgage early. A dent in his finances that he could have done without.
The lessons learned hold true for buy-to-let investors:
When mortgaging or remortgaging, consider how likely it is that you may want to (or need to) sell during the fixed term. Selling or remortgaging before expiry could prove very expensive.
If your fixed rate is coming to an end, or you don’t like the interest rate uncertainty surrounding Brexit, you should speak to a buy-to-let mortgage broker. If you aren’t sure where to turn, call one of the Ezytrac team today on +44 01522 503 717. We could help you find the specialists you need.
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