Traditionally landlords have sought flexibility and portability in a mortgage product, but now long-term financial security is increasingly appealing.
Mortgage rates for new investors and those seeking to remortgage have rarely been cheaper than they are today, but landlords are starting to feel the brunt of imposed changes to their business profitability and are starting to focus on long-term rather than short-term gains.
Lower than five year fixes
Taking on a 10-year fixed rate deal might seem drastic, but current rates can beat five-year fixes quite substantially. According to Moneyfacts, the average five-year fixed rate mortgage is currently 3.40%, while 10-year fixes are sitting significantly lower at around 2.8%.
TSB became the lender offering the lowest market rate for a 10-year fixed rate deal in September when they dropped their rate by 0.10% to 2.39% on a 60% loan to value (LTV) mortgage. Coventry Building Society currently has two 10-year fixed rates; 2.85% is available on a 50% LTV and 2.95% on 65% LTV mortgages.
Nationwide is the latest to enter the market, with a new competitive 10-year fixed rate range starting at 2.74% available on a 65% LTV, with a £1,995 fee, free standard valuation and £250 cashback. Although early redemption charges are applicable for the full ten years, they are also offering a rate of 3.24% which curbs early repayment charges at the end of five years.
Security over flexibility
Landlords fixing their mortgages can avoid the worry and hassle of remortgaging and the associated fees for a decade. The only question is whether the long-term security offsets the flexibility of being able to take advantage of cheaper deals on shorter terms?
For investors not planning on selling or remortgaging anytime soon, choosing a long-term deal is probably a sound decision. If however, selling is a possibility looking at a shorter term deal without the significant early repayment charges is the better option – although with Nationwide you can take advantage of a 10-year rate that doesn’t incur early repayment charges as long as you stay put for the first five years.
A significant advantage of 10-year fixed mortgages is the ability to borrow more. Today the majority of buy-to-let mortgages are only approved if the landlord can show that the rental income would cover the mortgage payment by a ratio of 145% if the mortgage rate increased to 5.5%.
This level of stress testing has caused problems for many landlords who previous to the new rules bought in by the Bank of England only had to cover the mortgage by a ratio of 125%.
However, these rules only apply to mortgage deals fixed to a maximum of five years. Landlords can opt for a ten year fixed deal where lenders can be more flexible with their affordability stress tests, as the payment certainty for ten years reduces the level of risk.
For some landlords, the ability to switch between deals and take advantage of lower rates will still be a viable choice, but those happy to sit tight on a low rate should be exploring the ten-year fixed rate options available to them.