To fix or not to fix your Buy to Let mortgage rate?

by Neil Patterson

6 years ago

To fix or not to fix your Buy to Let mortgage rate?

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To fix or not to fix your Buy to Let mortgage rate?

To fix or not to fix, that is the question so many people are not honest with themselves about.

In the early days of my career I saw interest rates go to 15% and then slowly creep down from that point. Around that time a significant proportion of customers were sold/chose cheaper fixed rates on remortgage deals of 10-11% the theory being they would escape the volatility of the market and be able to budget without risk.

However when I transferred to the mortgage desk a few years later around half of my time was spent dealing with complaints. These were customers trying to exit what had become comparatively expensive fixed rates, and not wanting to pay the early repayment charges that would be incurred.

It didn’t seem to matter that their reason for originally taking out the fixed rate may have been sound, but seeing new rates far cheaper than the rates they were committed to left them feeling “ripped off” and at the time I could sympathise with them.

The lesson from this has always stayed with me and if you are considering a fixed rate there are 3 questions I think you should be honest with yourself when asking:

1. Can I afford to pay that amount
2. Am I happy to pay that amount
3. Can I ignore what is happening to interest rates around me

As mentioned before fixed rates are an excellent way of being able to budget. This can be especially important in the business environment, such as being a Landlord, where cash flow is king, but too many people secretly treat fixed rates as a gamble against the money market and are left disappointed when it doesn’t pay off. What you need to remember is banks do not offer fixed rates thinking they will lose money and rarely do.

For more articles like this please see our Buy to Let Explained section

Comments

Jonathan Clarke

6 years ago

I`m a 3yr or 5yr fix person and build that into my model. It helps plan more effectively and the security it brings is balanced against normally less of a profit margin.  I`m not averse on occasions to chopping it in early and paying the redemption fee if needs be if I see an opportunity elsewhere where I could benefit. You take the best decision you can at the time so i dont  worry if some go against me.  Some have gone for me.  More so in the days when the redemption fee is reduced over time. Nat west used to do  a 5yr fix with a progressive 5/4/3/2/1% redemption fee so on a 50K mortgage in the 5th year it was only £500 to cash in. Nowadays with 3% fees  and 5% redemption rates throughout and high reversion rates onto the inflated SVR  the net has tightened on all fronts so i tend to let  them ride their course. So I favour 5yrs now so the fees are spread over a longer period and also by which time in `normal` market conditions I can release some equity for subsequent purchases. I though, like many others have not refixed in the last 3 years as rates have tumbled. Its harder to justify a refix when your reversion rate is a juicy 2% above base on some. But I am also mindful that it may leave me overexposed to interest rate rises so I have done a number of  4.99% 5yr fixes to counterbalance.  Steady as she goes 

Neil Patterson

6 years ago

Hi Jonathan a very balanced aproach and a good point about current BTL products as the devil is in the detail. The headline interest rates charged don't look that different to residential rates, but with 3.5% arrangement fees, 1 year terms and high redemtion penalties you need to be even more careful than ever about picking the product that works for you.
I can also see why you would favour longer term fixed rates so that you can spread the costs. Another factor I like to remind people of about shorter term fixed products is that you have only reduced the risk element for a short period of time and if you then try to remortgage you are at the mercy of the market you were trying to avoid.

Neil Patterson

6 years ago

Hi Jonathan a very balanced aproach and a good point about current BTL products as the devil is in the detail. The headline interest rates charged don't look that different to residential rates, but with 3.5% arrangement fees, 1 year terms and high redemtion penalties you need to be even more careful than ever about picking the product that works for you.I can also see why you would favour longer term fixed rates so that you can spread the costs. Another factor I like to remind people of about shorter term fixed products is that you have only reduced the risk element for a short period of time and if you then try to remortgage you are at the mercy of the market you were trying to avoid.

John Corey

6 years ago

A well balanced strategy Jonathan.

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Iain Duncan Smith MP at National Landlord Investment Show London