Terms and rates of interest for BTL mortgages
There are several different ways that interest can be charged on a landlords’ buy-to-let mortgage:
A fixed interest buy-to-let mortgage is one where the interest rate is fixed at a specific rate for a predetermined period of time ranging from 12 months to the full term of the buy to let mortgage. Typically the period is between 2 and 5 years. The great thing for the landlord as the borrower is certainty – knowing what ever happens to interest rates a landlord’s payments will always be the same every month. The downside is if interest rates fall is that you as the landlord are left paying much more than your fellow landlords on a variable rate – it’s a gamble!
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Discounted rates, as they suggest offer a reduction in a buy-to-let mortgage interest rate for a limited period of time. This discount period is sometimes very useful. For instance it will reduce any negative cash flow on a residential investment property lying empty whilst it is being refurbished.
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This type of mortgage really came into being to ‘protect’ house buyers from dramatic rises in interest rates such as those experienced in the early 90’s; just after the U.K. withdrew from the ERM. Capped mortgages have had their day as the chances now of dramatic interest rate movements are now highly unlikely.
Trackers (base rate or LIBOR)
This type of mortgage is so called because the mortgage rate is linked or tracks the Bank of England Base Rate or LIBOR (London Inter Bank Offer Rate). When these change, so does a landlord’s mortgage interest rate. Landlords can often get attractive deals with these mortgages because they are a low risk product for BTL mortgage lenders as any increase in the cost of borrowing can be instantly passed on to their customers. Bank of England base rate trackers follow the rate of interest set by the government, whilst LIBOR is the rate that commercial banks are prepared to lend to each other.
The credit crunch in 2007 highlighted that whilst the two are normally very similar; during times of financial crisis the latter is likely to move higher and be less stable than the Base Rate. LIBOR is a floating rate and therefore constantly changes. It reflects the financial markets future expectations of the Bank of England’s Base Rate. For the best tracker rates from our favourite mortgage brokers have at the best rates links.