Are buy-to-let mortgage rates at their nadir, or could they fall further in the coming months?
This time last year, it was thought a possibility that interest rates could rise before the general election in May 1, and homeowners and investors alike were warned to fix their mortgage rates soon or face rising costs.
Hindsight, as the saying goes, is twenty-twenty. Falling energy costs and a so-called ‘price war’ between supermarkets have suppressed inflation to rock-bottom levels, and even prompted Bank officials to entertain the notion of cutting the base rate further 2.
Average buy-to-let mortgage rates, meanwhile, are at their lowest ever level, according to the latest research. Competition between lenders has created a climate that is very favourable for landlord borrowers, with cheaper and more flexible finance available than ever before 3.
So where can rates go from here?
Writing for This is Money, editor Simon Lambert suggested that mortgage rates in general may currently be in a ‘sweet spot’. The fallout from the Mortgage Market Review, which arguably helped to buoy the buy-to-let market by causing a slowdown in residential lending when it was introduced last April, has largely passed, and lenders are catching up with residential business in a currently strong housing market 4.
If there is a further cut in the Bank of England base rate, there is no guarantee that this will have a marked effect on mortgage rates. The majority of tracker mortgages are ‘collared’, meaning that they can’t go below a certain level – which, coincidentally, tends to be very close to the introductory rate that borrowers pay when they first take out the loan. Fixed rates, meanwhile, are more responsive to swap rates than to the central bank rate, and though swap rates have recently fallen, this can change quite literally overnight.
Nevertheless, tracker mortgages have advantages beyond the fact that they can go down with the central rate. Firstly, to entice borrowers in spite of the risk of rising repayments, initial rates tend to be slightly lower than those of comparable fixed rate products. Product arrangement fees also tend to be lower.
If the base rate truly won’t begin to rise until late 2016 or beyond, then a cheaper mortgage may indeed be worth the added uncertainty of a non-fixed rate. Even if rates rise earlier (current inflation projections point to a potential increase at the end of this year 5), a tracker mortgage might still be better value, as the Bank of England intends that any upward movement in interest rates will be gradual.
Ultimately, of course, there is no right or wrong answer that can be applied to everyone’s situation; the choice to ‘stick or twist’ will depend on your own business plans and attitude to risk.
If you are considering switching your buy-to-let mortgage, pay particular attention to fees. The true cost of a mortgage is influenced by lender fees as well as the interest rate, and particularly with smaller loans, it might be beneficial to opt for a mortgage product with slightly higher rates if doing so will allow you to save on fees.
Furthermore, note whether there are any early repayment charges. If you like to regularly switch your mortgage to make sure you are getting the best deal, or if you simply want to leave yourself an exit route, be aware of any penalties you might face for redeeming your loan early (early repayment charges, or ERCs). Such penalties can be significant and can easily erode any money you might have saved by switching to a cheaper rate. ERC-free buy-to-let mortgages are becoming more commonplace, and such products are a definite boon to borrowers in times of uncertainty.