The market predictions were BBR would rise above three per cent by the end of 2022 and could be as high as 4.25 per cent by August 2023. In the last 24 hours, this has changed to the possibility of rates rising to six per cent.
These increases will mean a spike in cost for mortgage lenders, which as we have already started to see, and this will inevitably need to be passed onto the borrower.
Advice at the right time
Landlords who have mortgages set to mature during this period of anticipated higher rates will almost certainly see increased mortgage repayments. So, what can landlords do to manage their portfolios in a rate increasing environment and how can brokers help them?
First, as brokers we should be contacting our landlords and reviewing their whole portfolio. It’s important that landlords know which properties will be coming out of a fixed rate over the next year and act on these at the appropriate time. Some predictions indicate rates will return to previous lows after peaking, so concentrating initially on the shorter term may be prudent.
Most mortgage offers are valid for a period of three months and currently the mortgage application period is taking over three months to get to offer stage. This means it’s worth starting the process six months before and checking the lender’s likely service standards and offer validity time to ensure you are applying at the right time – not too early but equally, as early as possible to secure the best rate available.
The era of the long-term fixed rate
The market has moved significantly. We have seen the rise of the longer-term fixed rate over the last few months, with several buy-to-let lenders moving into the seven-year and 10-year space. While, traditionally, landlords have not opted to be tied in for such an extended term, we are starting to see a shift towards some fixing for this longer period, which gives the landlord certainty of outgoings and the ability to fix the rent payments for tenants.
While fixing for a longer period might seem a big commitment, many lenders’ products offer portability and/or lower early redemption charges (ERCs), which makes the longer tie-in more flexible.
Over the last decade, we have seen little other than two-year and five-year fixed rates, however, in more recent months we have also seen landlords moving onto discounted trackers with no ERCs. Perhaps for the landlord who doesn’t want the longer-term fixed or who feels the higher rate environment will be short lived, these rates are offering a lower headline rate and no tie in.
Rates still competitive
While rates have already started to increase, they are still very good compared to pre-credit crunch averages of around 5.5 per cent on a two-year fixed. Landlords who have mortgages coming up for renewal in the next few months can apply early to secure today’s low rates and, in some instances, might weigh up paying the ERC to leave their current lender with only a few months left in order to get the rate they want to fix into for the next five years.
Finally, it is, of course, worth considering raising capital to improve the property. While increasing borrowing in a raising rate environment might not at first seem like the best route, these works could attract a better tenant that is likely to stay in the property for a longer period.
We have talked a lot about the green agenda and the need to upgrade properties to achieve EPC C or above by 2025, all privately rented properties needing to meet the standard by 2028. On top of that, re-investing money into your property to make it more energy efficient could again make it more attractive to potential tenants. If you’re running an HMO or pay the energy bills yourself, all the more reason to reduce the energy bills.
