What you shouldn’t do – buy to let mortgage adviceMake Text Bigger
Buy to let mortgage advice
Many investors have become cashflow beneficiaries of the ‘Credit Crunch’ due to the lowest interest rates in history. A question I am often asked is, “Should I use the extra cashflow to reduce my mortgage balances?” I appreciate that one day interest rates will go back up again and the base logic for what I consider to be the incorrect decision to repay debt now is to reduce payments in the future. However, as property values fall it gets harder to borrow. When dealing with a crisis position, e.g. a desperate need for cash or unaffordable mortgage payments, would you prefer to have a slightly smaller mortgage or extra cash in the bank? Why pay debt with low margins and then borrow back at higher margins when you need cash? Property Investment involves positive cashflow and management of liquidity. In my opinion, there is no sensible argument for making capital repayments on the mortgage, especially if you are still expanding your portfolio or may need to access funding for other purposes.
Another question is whether to remortgage for fixed rates. None of us has a crystal ball so it would be remiss of me to advise you not to do this. However, if your existing mortgage is on a tracker you should compare the margin over base rate you are paying now to similar tracker products currently being offered by the same lender you are thinking of remortgaging onto a fixed rate with. The likelihood is that their variable rates are much higher than you are currently paying. This is because their profit margins have increased as demand for mortgages has outweighed supply. Its probably fair to say the banks have a far better insight into what interest rates will do over the period of a fixed rate than most people. Therefore, any fixed rates mortgages they are offering now will be priced on what they think interest rates will average, then they will add a margin for error, then they will add their more expensive margin. The result is, if you refinance onto a fixed rate that includes a higher profit margin for the bank the odds suggest that you will lose out. It is also highly likely that you will lose flexibility.
That leaves just one question then. Why are people still refinancing? The answer is usually that they missed the boat. If they could turn the clocks back they would have refinanced to release equity when they could borrow 90% LTV at base plus 1%. However, they’ve now realised the error of their ways, they’ve recognised that property is now comparitively very cheap and that that yields are strong and improving. Accordingly, they are refinancing to release equity, despite having to pay far higher interest rates, on the basis that the extra cash will fund new purchases and the gains from those purchases will outweigh the extra costs.
In conclusion therefore;
- Don’t pay loans down, retain cashflow and liquidity
- Do refinance if you can raise extra cash to take advantage of market conditions
- Don’t refinance if you can’t release equity, especially if you have a tracker mortgage at present.
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