Fixed Rate Mortgage Review
Interest rates were held by the MPC this week for the 13 month in succession.
Great! Long may the economy stay depressed I say……
We know it won’t last for ever. Inevitably interest rates will start to rise to a more normal and sustainable level. Historically long –term base rates should be of the order of 5-6%. This puts the average buy-to-let mortgage rate at about 6.5% to 8% depending on the margin.
The latest poll figures from Reuters indicate that rates may not rise dramatically this year. However, with the election results due by the end of May and the economy showing signs of a recovery then events can show a dramatic change. Henk Potts of Barclays Wealth recently predicted on Radio 4 that rates would remain unchanged this year but get to 3% by the end of next.
Fixing with a fixed rate
The biggest cost faced by most landlords is inevitably their finance costs. The best way of not getting caught out by a sudden shift in rates is to fix your BTL mortgage costs.
I would never suggest that a landlord buying a new residential investment now should consider fixing for a 1 or two years. The associated charges of arrangement fees, of these type of buy-to-let products don’t really warrant this type of buy-to-let mortgage as the base rate upside is limited in the short-term. However, longer term fixed products, which deliver the certainty of a interest rate payments at a certain level are certainly on my radar as I look to extend my portfolio.
A five year fixed rate at 6% or below would give me the comfort and certainty of a steady cash flow from a new investment providing I keep the property rented.
What are the best 5 year fixed rates?
I used Property Hawk’s new buy-to-let search facility to unearth some of the best long-term fixed rates on the market.
The leading rate on the market for a 5 year fix is with Whiteaway Laidlaw Bank. They are offering a rate of 5.39% with a maximum LTV of 70%.
The downside of the Whiteaway Laidlaw product is that it require a minimum income for the applicant of £40,000 which will put this out of the range of many landlords.
This is closely followed by the Mortgage Works a Nationwide BS off shoot which is offering a 5.79% fixed until 31/05/10 also up to a maximum LTV of 70%. The Mortgage Works product fees can be high for higher value properties as they come with a 3.5% fee. The advantage is that they are available for portfolio landlords with a portfolio value up to £1.5m and £5m where a landlord is prepared to drop their LTV to 65%.
The Leeds BS also offer a 5 year fixed rate up to 70% LTV with an initial pay rate of 6.29%. Fees on this product are a flat rate £1350 plus £199 booking fee making it a cheaper alternative for higher value investments.
For those landlords looking at avoiding large fees then the Post Office is one of the best priced products I’ve found. The introductory rate is fixed at 6.09% until 30/6/15 and the arrangement fee is a flat rate of £999. The attractive feature about this fixed rate buy-to-let mortgage is the reversion rate. This is only 2.99% above the base rate for the remainder of the loan. The minimum income for applicants to this mortgage is £15,000 although the self employed can qualify.
Locking in the benefits of low interest rates
Landlords that are looking at buying a new investment property and extending their portfolio should seriously consider locking in the benefits of the current low interest rate economy.
Those investors who are waiting for the margin on loans to fall back to the 0.5% above base that were common at the peak of the boom will be disappointed. The combination of record amounts of ‘cheap money’ being available on the capital markets for property investment will not be available in the next couple of decades. Margins on buy-to-let mortgages in my view will remain at 2-3 % and if rates jump in the next couple of years to nearer 5% then landlords looking to fix their medium term mortgage costs below 6% will have missed the boat.
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