Contingency planning for BTL mortgage rate rises

Contingency planning

Andy Young, at Property Hawk Mortgages says:

It is highly likely that interest rates will start to rise during the course of the next couple of years, although I think the increases to Bank of England Base Rate will be small and in gradual increments, perhaps reaching 2.00% by the end of 2016. This of course means that the pricing of buy-to-let mortgages is likely to rise too as lenders retain their profit margins.

When considering the implications of a potential rate rise, there is no need for landlords to panic, but some contingency planning is definitely prudent. It is advisable to consider whether current rental income is sufficient to cover any increase in monthly mortgage payments and to ensure a surplus for potential void periods. Most lenders are conservative with their rent stress tests and will only approve a buy-to-let mortgage where the rental income is at least 125% at a notional interest rate of 5.00% of the loan amount. This should provide a sufficient rental income buffer for most properties.

For landlords who prefer to know exactly what their monthly payments are going to be, choosing a fixed rate mortgage may be the preferred option. At Property Hawk Mortgages, our most popular buy-to-let products are often 2 year fixed rates. However, there has also been an increase in demand for 3 year and 5 year fixed rates in recent months.

There is certainly a good argument for fixing over a longer period such as 5 years. Although 5 year money is more expensive and the monthly mortgage payment will be higher, it does provide security and peace of mind over the longer period when interest rates start to rise.

Examples of fixed rates currently available:

2 year fixed - Mortgage Trust - 2.39% fixed until 31/12/2016 up to 75% LTV with a 2.50% completion fee and a free valuation

3 year fixed – Virgin Money – 3.39% fixed until 01/01/2018 up to 60% LTV with a £995 completion fee and £500 cashback

5 year fixed – Accord Buy to Let – 3.99% fixed until 30/11/2019 up to 75% LTV with a £800 completion fee

Although Base of England Base Rate is predicted to rise, I believe that 3 years into the future the ‘new normal’ is likely to be between 3.00% and 4.00% and that rates will remain lower than historical ‘pre-credit crunch’ rates of around 5.00%.

IMPORTANT! Due to current market conditions, lenders are withdrawing and replacing products with little or no notice. Please check our website regularly to see the most up-to-date products available.


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