What Rates Will Impact Buy-to-Lets Hardest?
Mortgages are a big part of life – probably the biggest debt most of us have, but often something that we don’t entirely understand.
On the Mashroom Show, we always stress the importance of engaging with a good broker when you are looking at taking on a mortgage, but of course, it’s really helpful to have a bit of an understanding of what you’re signing up to!
With the financial climate as it is, especially with the Bank of England’s interest rates hitting the news yet again this week as they stick at 5.25%, we always have plenty of landlords asking questions about the details of their mortgage agreements. So, we thought it was high time we did a deep dive on the whys and wherefores of the agreements and tried to answer some of the more technical details!
In this episode:
- We bent Mashroom Mortgages’ Susan Whitley-Park’s ear about the Bank of England’s base rate, and what impact it really has on your bottom line
- She explained futures to us – terms we all hear, but let’s be honest, not many of us really understand!
- And with lenders bringing in new products for landlords, we looked at what options are now available that you may now previously have considered for your portfolio
The economy explained
Right, the Bank of England. They’ve been hitting the headlines again this week, and interest rates seem to be creeping down… which must be good news, right? For most of us though, knowing that down is good, and up is bad is pretty much where our knowledge comes to an end! Can you give us a little more insight? An economics ABC, if you will!
‘The Bank of England base rate is put together by all sorts of things,’ explained Susan. ‘Obviously it is the Bank of England, so they will look at inflation. They will look at how much money has been generated by UK PLC if you like, and they try and bring down the inflation.’
By increasing the Bank of England base rate, borrowing becomes more difficult for us, it becomes more expensive, with the hope that increasing costs will curb our spending and bring the inflation down. With that in mind, the Bank of England base rate is fundamentally kind of a lever that has an impact on our future.
So, the Bank of England’s decision-making really does have a real impact on every element of our spending life then. Mortgages are obviously a big cost to many of us, and they’re really hit heavily aren’t they?
‘All sorts of things come into mortgage rates,’ agreed Susan. ‘We hear about the Bank of England base rate, we hear about the cost of living, we talk about inflation. We also talk about the unemployment figures a lot.’
‘There’s also other things that come into play that are slightly more speculative. It might be that we have to consider the effect of world events that might be coming up? It might be we have the Autumn Budget coming up. Even changing world leaders could have an effect on what we’re doing.’
And is that the sort of thing that’s impacted the base rate this week?
‘The Bank of England has announced that the base rates will not be increasing at this time holding at 5.25%. They have hinted that we are nearing the peak of its base rate increases, which is good news’, explained Susan.
‘Economists are predicting that rates will peak at 5.75% or 6% by the end of quarter one next year, and then stabilise, so that the Bank of England can see the impact of the measures they’ve already taken’.
There is still talk of the UK going into a very mild recession at the end of this year, or into the beginning of next year. It’s predicted that the base rate won’t start to drop until the beginning of 2025 and then it will fall very gradually. Experts estimate that the base rates will be around 3.75 percent by 2028.
So, tentative good news?
‘We have plenty of events coming up before the Bank of England sit again in November, such as the publication of data on inflation, unemployment, and speculation about the Autumn Budget announcements. When we are looking at mortgage rates, these will depend far more on swap rates’.
‘We are seeing many lenders lowering rates, tweaking affordability and fees on limited edition or relatively small tranches of money. It is important to work with your advisor to make sure that when one of these rates becomes available, they have everything they need to be able to add to quickly for you. When these rates have gone it’s gone. And they are proving to be very popular’.
Theres plenty of changeable issues there that certainly aren’t immediately obvious. It’s been a topsy-turvy few years on the world stage, considering all of those components its hardly a surprise that mortgage rates are chopping and changing too. Whilst it is obviously difficult as a consumer, it must be tricky as a lender to predict such changeable circumstances?
‘If you’re a lender, you need to be sure where you are getting the money from,’ explained Susan. ‘Is there enough in savings balances? Am I going to be able to borrow enough off other investors?’
‘It can also come down to things like if there are enough staff available to deal with enquiries if a fantastic rate is announced. There are all sorts of things that could have a real impact, and banks that actually lend the mortgages have to factor all these things into account’.
Swapping and changing
Can you explain what swap rates are, and why they’re becoming such a feature? Is this part of the changing landscape, or have they always been hovering in the background?
‘Swap rates are a really significant factor’, said Susan. ‘They are a significant factor in how lenders make a profit in really, really basic terms.’
‘Savers invest money, and lenders take that money that is invested. They then lend it out to borrowers at a higher rate of interest than you’re going to pay your savers. So that’s the basic basics!’
‘If you’re lending, it’s all on standard variable rate. That’s pretty easy because if the Bank of England put the base rate up, then you would just take that margin and increase it again. So, the lenders profits are safe. However, we lend a lot of money now on fixed rates, so that’s going to be very different’.
‘If a rating is fixed, and that margin changes because the variable rate goes up, the lenders profits are going to be eroded. We forecast our whole company and what we’re going to do on these profits, so that is where swap rates come in’.
‘As a vendor as a mortgage lender, I would go out to the market and speak to other lenders. I’d say ‘can we buy in this money at this rate, for however long’ we would thrash it out. This is where that speculative bit comes in, because they’re all looking at trying to forecast betting on what the country and what the economy is going to be doing’.
So, they’re ultimately looking into a crystal ball and guessing the future then? Possibly an educated guess, admittedly! Hold on, is this what’s known as futures?
‘Futures is literally what is happening in the future’, laughed Susan. ‘They are trading on what they think will happen in the future, whatever that may be. Some of it they will know some of it is guesswork’!
Are swap rates simply to secure the lenders profits then? Is there any benefit to the borrower?
‘With the swap rate, usually if I’m a lender and I’m buying money from you, it’s usually done on a two, five or 10-year term. Surprisingly enough, most fixed mortgages are on a five or ten-year term.’
‘There’s a direct link between the borrowing rates that the banks get for themselves, and those that they can refer to us as consumers. With lenders at the moment, it all depends on how much money they can get at a rate. So quite often, you’ll find that they get quite small tranches, so maybe they would buy in a certain amount over two years at quite a small tranche and they’ll put on a special offer – but when that money’s gone, it’s gone’.
‘You hear a lot in the press at the moment about rates being pulled really quickly. This is why. Someone might have a tranche of money over two years, but once it’s all lent out, it’s gone’.
Ratings system
Mortgages are rarely a short-term loan. You mentioned earlier that lending timeframes usually fall into two, five and ten-year chunks – with most people likely having to remortgage after that point. With the base rate bouncing about is it always advisable to go for the longest length of loan you can, or are short term fixes a good idea? And are you going to be looking at different rates depending on the duration?
‘It’s all about speculation again’, said Susan. ‘If you look at a lot of the forecasts from the Bank of England, they’re looking at it maybe going up to six percent by the end of the year. That may all change though!
It’s just kind of a snapshot at the moment. Currently, the five-year fixed rates are cheaper than the two-year fixed, because the lenders are looking at it and thinking that we’re likely to have more stability at the end of five years’.
A lot of customers, especially landlords, are actually betting on two-year rates. They’d rather pay that slightly higher rate at the moment, but are speculating that in two years’ time, better rates will be available.
‘I think that if you would rather know exactly what you’re going to pay for the next five years, you’d probably be happier to be locked into a longer rate. But some people are thinking ‘actually, I think I’m better off paying a bit more for two years now. Because in three years’ time, I’ll be able to get an even better deal, and I’ll actually save more money in the longer term’.
Ultimately, there’s a product for everyone, but not every product will be right for every person?
‘There’s no one size fits all here. It’s all about the individual, and what their financial goals are’, agreed Susan. ‘I would always say sit down with a qualified buy-to-let specialist advisor will look at your whole portfolio and work out what’s going to work out best for you.
Backing out
What happens if you have taken the advice, decided on your product, locked into a long-term deal (let’s say a 10-year option) and your circumstances change? We’re all highly aware of how quickly things can change (looking at you, Covid) and with such a hefty chunk of time ahead of you, is there an option to make changes once you’ve signed on the dotted line?
‘It would depend why you’re having buyer’s remorse,’ said Susan. ‘You could see that the five-year fixed rates, for example, are lower than two-year fixed rate. After two years, you might find that rates are going down, and you’re thinking I’m stuck high and dry! You can get out of it however you would pay something called an early repayment charge (ERC)’.
‘Your mortgage offer will stipulate exactly what that ERC is going to be, usually it’s a percentage of the outstanding balance. If for example you’ve got a five-year fixed rate, and you think ‘oh, no, big mistake!’ in year one of the five-year fixed rate, you’re likely to pay about five percent of the outstanding balance to get out of it. It’s on a falling scale, so if you’re two years before the end, you could be paying two percent. Always have a look at the details on your offer and talk to your mortgage advisor’.
We always come back to talking to your mortgage advisor, that seems to be the stand-out advice every time we speak about mortgages! So much can change in this sector, and this really is too big a decision to try and make on your own!
Market stability
With changes in mind, what is the overall picture looking like at the moment? Is the market feeling relatively stable for landlords?
‘You have to remember that for landlords, property is an investment – and investments go up and down,’ mused Susan. ‘That’s what I’ve always been told throughout my whole career in in finance’.
It has been more difficult of late. But we are now seeing lenders use a bit more flexibility, and rates seems to be going down. That could be because the banks or lenders are now seeing what the government’s been doing, so that’s giving them the confidence to bring rates down. It’s ticking away, and they’re also becoming softer around stress testing. This is all good news.
Time ticks on
Whether your mortgage is fixed for two years, five years or ten, one thing is certain, it will eventually come to an end and you’ll need to look at remortgaging. For many of us, this can be a bit of a last-minute scramble, and sometimes that panic may lead to us not getting the very best deal.
As the years creep by, how soon should we be looking at new products and exploring different options? Is it worth even thinking about before the end of the term, or are we likely to just get overexcited (or miserable) with false hope about current interest rates?
‘Depending on what type of rate you’re on, my initial reaction is five years. I know it is a long time, but if you’re lucky enough to get a five-year fix let’s take advantage of this,’ explained Susan. ‘Let’s have a look at what you can do. Can you save some money? Can you make overpayments off your mortgage? Can you reduce down that mortgage amount, so within five years’ time or when your mortgage rate comes up, you could have a lower payment to have to re-mortgage’.
Is budgeting to overpay actually a good option though – are there not concerns that you might be hit with hefty repayment charges?
‘Make sure you check your paperwork for your early repayment charges because most lenders will only let you over overpay about 10% a year – but do check your paperwork or talk to your mortgage advisor to check the paperwork on that’.
‘You could either make payments directly, or you could put it into a savings account and at that five year point or when it comes to an end, you could make a lump sum payment.
Prior preparation is definitely key when it comes to mortgages then. If you haven’t pre-planned, any the end is in sight, how late can you leave it before you start looking at new products?
‘I would say if you haven’t done anything else, at least seven months beforehand, start speaking to your mortgage advisor,’ stressed Susan. ‘You are likely to get an offer from your existing provider, but you also want to see what else is out in the market. Your advisor will do that for you. The mortgage advisor will also read all the T’s and C’s and check for you, but you’re not actually going onto that rate for six months. So, if things change, your mortgage advisor will let you know and you can change your plans.’
‘Your mortgage advisor should be proactively looking at rates whenever they change and letting you know whether there’s better rates available to you’.
Susan’s Top Tips
- If you’re benefiting from a lower rate, save so that you can reduce the balance of your mortgage when it’s time to re-mortgage. You can either pay off a lump sum at the end of the fixed rate or make overpayments, but do make sure you read the terms and conditions of your existing mortgage to avoid being hit with a penalty.
- Green mortgages on properties with an A to C Energy Performance Certificate (EPC) rating can attract lower rates, so you might want to invest in making your property more energy efficient.
- Many landlords have not increased their rent for a long time and are concerned about having to make big increases and the impact on their tenants. Make smaller increases to get your rental income where it needs to be so that you have more choices available when it comes to remortgaging.
- At least seven months before your fixed rate comes to an end, speak to an advisor. Most lenders mortgage offers are valid for six months, so it may be best to secure a rate sooner rather than later.
- It is never too soon to speak to a mortgage advisor and come up with a plan – the better the plan, the better your options!
The next episode of the Mashroom Show is airing on Friday the 6th October. In the meantime, why not head on over to Facebook and join the Mashroom Landlord Community Facebook page. There are over 8,000 landlords regularly chatting, sharing queries and questions and engaging with industry experts, so it’s a great place to have a chat about what’s on your mind, and get some great advice.
