With many borrowers on a nice comfortable low variable rate mortgage there has been little temptation to move onto a fixed rate. The economy was weak, austerity measures were sure you push down demand and prices and therefore a rate increase was seen as unlikely. That all changed this month as the resiliant British economy posted inflation at 3.7% significantly over target and increasing pressure on the Bank of England to consider a rate increase to bring this under control. Following from this several lenders have given rate withdrawal warnings on their key 5 year fixed rates. Is now the time to consider locking one down?
Impact on Buy to Let Pricing
A few decent fixed rates have crept into the buy to let market at present. Some even have low fees (the Marsden was famous for most of 2010 for introducing some really nicely priced buy to let remortgage products with free valuations and legals thrown in). This led a lot of landlords on ‘marginal’ variable rates – those cheaper than fixed for now but not by a lot – to take the plunge and lock down their payments through these uncertain times of high lending margins and rising interest rate pressure.
Those of you who choose to wait will benefit from what will likely be a slow progression of rate rises taking time to impact on your profitability. However many landlords face the bleak choice between locking down a breakeven rate now and hoping that future reduced margins and property price rises will bring them a return to profit or taking small profits now with the certainty that a couple of rate rises will lead to them having to plug a rental shortfall or push through significant rent rises at a time of weakening demand driven by job losses and inflation running at above the level of wage increases.
Now could definitely be the time to sit down with our adviser and consider if some properties need to be disposed of and of the ones you are keeping which ones need to be refinanced to ensure you aren’t swimming upstream for the rest of the decade. A full portfolio review can be arranged through the ProBuyToLet referral service – simply complete the short form and we’ll be in touch.
What About Falling Lender Margins?
Some have suggested that at present margins are so high simply because to obtain funds to lend there is no way savings products can be offered at close to base. The margin over the true cost of funds to the banks isn’t actually much different to the levels historically. Facing this information it would seem logical that a base rate rise wouldn’t push savings rates up significantly and therefore wouldn’t necesarily deliver a significant increase in cost of funds to the banks. If this were true then the gap between base rate and buy to let rates would fall over the next 2-3 years reducing the pressure on investors who chose to stay on a variable rate.
Lenders don’t necessarily share this view and at a few conferences I have attended recently they very much are looking to pass any improved cost of funding onto what they see as the safest and most desireable opportunities. For many lenders this is simply ABC residential lending. This could mean buy to let margins continue to be significantly higher than residential despite banks facing a lower premium of cost of funds over base rate than at present.
There is by no means a simple answer to the question “is my buy to let portfolio better off on a fixed rate?”. Longer term fixed rates are not a feature of the market and the short term ones may not yield a benefit before they run out in any case (base rate might not catch up quickly enough). For some portfolios however switching to a fixed rate might be the only way to shore up profitability and ensure security for the landlord over what promise to be some tricky years. Professional advice, planning and research are going to be important to ensure 2011 goes to plan.