The good news is that research has identified landlords as being the biggest winners from the recent decade plus run of low interest rates. Owner occupiers tend to take out mortgages that repay both interest and capital whereas landlords with buy-to-let mortgages are usually repaying just the interest. This is one of the reasons why the era of low rates ushered in by the financial crisis of 2007-8 was such a big plus in making being a landlord look so attractive.
Of course, the situation is changing and landlords can no longer bury their heads in the sand about interest rates. The only way is up. The Bank of England has been dropping very heavy hints over the past months about the need to raise rates to get back to some sort of normality following the market crash.
We saw the first base rate rise last November which took the rate from 0.25% to 0.5% but most forecasters do not expect this increase to be the last. The Bank’s Monetary Policy Committee meets again this week on March 22nd but that may be a little too early to see the next hike. The month of May looks more likely with possibly one more rate rise after that before the year is out.
Much has been written about the landlords who dashed to grab two-year fixed rates mortgages to buy properties just ahead of the April 2016 increase in Stamp Duty and they will certainly be returning to the lending market. But there will be other landlords who have not looked at their mortgages for much longer than that.
Undoubtedly there will be a number of landlords still on SVRs either because a fixed rate expired, or they have drifted onto this rate with their existing lender or perhaps because of historical reasons due to changed personal circumstances. Whatever the reason these landlords are going to wake up to a very different mortgage market today.
Firstly, the number of lenders and deals on offer has increased considerably over recent years. When we at Property Master seek to match landlords against the best deal for them we are now scanning 90 plus lenders but that is just the start.
Each lender will offer a range of fixed rate mortgages for a range of different Loans to Value so there can be a bewildering variety of choice. And it is not always the lowest rate that represents the best value. Landlords also need to factor in arrangement fees which can total up to £2,000 which can take the shine off what looked like the cheapest offer.
Many landlords wanting to revisit their rate may well be concerned about redemption fees. Is it worth paying a fee to find a new lending deal? The answer is with rates going up it may well be the right thing to do. If a landlord is on a comparatively high interest rate and there is a mortgage deal that is much cheaper it can be worth biting the bullet and paying a redemption fee to gain the lower rate.
The other big change some landlords who have been out of the market for a while will notice is their now more formal status as portfolio landlords. Since last year landlords with four or more properties will now have to, if they haven’t done so before, run their properties much more like a business. New stricter lending criteria which came in from last year for this class of landlord has hastened the greater professionalisation of the marketplace.
Portfolio landlords should expect to be asked to provide a range of paperwork to any prospective mortgage lender to prove that each property within their portfolio is performing well in terms of rental returns. Any one property not pulling its weight could potentially lead to a lender declining to lend. It pays to prepare in advance to convince a lender you are a good bet.
Finally, the regulatory environment around the private rental market continues to tighten and this means landlords need to manage their finances much more closely. As we know landlords used to be able to deduct the full amount of their mortgage interest costs from the income they make but now this is being reduced year on year until it reaches a basic rate tax reduction only.
This lost income should spur landlords into leaving behind unattractive interest rates. Likewise, pressures around the need to comply with new regulations such as the new Minimum Energy Efficiency Standards due to take effect on April 1st or changes around landlord licencing should also be a spur to action.
The private rental market is changing fast and coupled with the new higher interest rate environment the need to find the best mortgage deal is more important than ever. Despite the threat of higher rates and the ending of sources of cheap borrowing for banks such as the Term Funding Scheme there are still some very attractive mortgage rates around – especially if landlords are prepared to fix their rate for five years.
How much longer these offers will continue for is very difficult to predict. We are seeing record applications at the moment which suggests many landlords are seeing the need to get their finances onto a new footing before it is too late.