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Two-year fixes bounce back as landlords opt for flexibility

  • 17/02/2020
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Two-year fixes bounce back as landlords opt for flexibility
The proportion of landlords choosing two-year fixed rate deals has risen to 26 per cent in the last three months of 2019, from just eight per cent in the same period in 2018.


According to the Mortgages for Business (MfB) Buy-to-Let Mortgage Index, this was the highest figure in more than a year and was driven by landlords seeking shorter early repayment charge (ERC) periods.

Five-year fixes remain the most popular product type chosen however, with 68 per cent of completions in Q4 2019 being for this term – slightly down from 70 per cent the previous three months.

Tracker and discounted rate products saw a marginal increase in popularity up from two per cent in Q3 to four per cent in Q4 2019 as landlords respond to increased speculation that the Bank Rate could be cut in the near future, Mortgage for Business added.

Reflecting similar changes in the residential market, lenders continued to trim margins at higher loan to values (LTVs) decreasing from an average of 0.64 per cent above the headline rate to 0.62 per cent.

Margins at low and medium LTVs both maintained the same average rate as of Q3 at 0.47 per cent and 0.54 per cent respectively.

The number of buy-to-let mortgage products available increased by 72 to 1,981, with limited company deals up by 51 to 738.


Application values up

MfB also includes details of transactions completed through its firm as part of the research.

By volume of applications, 48 per cent were made by landlords using limited companies, with 52 per cent by landlords applying personally.

However, this was reversed when considering value of applications, at 51 per cent through limited companies and 49 per cent privately.

It also found that generally, average buy-to-let loan amounts increased slightly in Q4 compared to the previous quarter, with those for limited companies up by £23,006, and personal loans by £16,023.

Completions through limited companies outnumbered personal deals, taking 51 per cent of completions up from 49 per cent in Q3.


Chasing yields

Houses in multiple occupation (HMOs) continued to produce the most substantial yields – at 9.2 per cent in 2019, they performed better on average than in the previous two years.

Semi-commercial properties continue to grow in popularity with residential landlords looking to diversify and achieve higher yields, MfB noted.

The figures show that yields from these properties have been highly volatile over the last three years.

In Q4 2019 they returned an average of 7.4 per cent, but this quarterly figure has fluctuated between five per cent and 10 per cent since 2016.

Vanilla buy-to-let properties maintained their consistency, yielding an average, if unremarkable, 5.8 per cent.


Longer term fixes to return

Steve Olejnik, managing director of Mortgages for Business said: “Recent political uncertainty has led more landlords to opt for two-year fixed rates over longer-term fixed rate products.

“Landlords are drawn to the shorter ERC periods associated with these types of products, which provide greater flexibility.

“Given we now have more certainty in the political system, we forecast that landlords may start to look at longer term fixes again in the future.”

Olejnik added: “More landlords are expanding their portfolios through a limited company which has proven to be a more effective borrowing vehicle both from a tax perspective and financially.

“Lenders have responded to that and demand has fuelled an increase in the number of products available.”


Increasing tenant demand

Meanwhile, research from Paragon found that four in 10 landlords believe 2020 will see increasing demand from tenants.

Paragon’s Trends research found that 37 per cent of landlords expect tenant demand to grow during 2020, compared to 7.3 per cent predicting a fall.

Paragon managing director of mortgages Richard Rowntree said the lender expected to see demand continue increasing in the coming years, noting it was important to ensure tenants had a good choice of property and rental inflation was kept under control.

The English Housing Survey found the number of households in the private rented sector has remained unchanged at 4.6 million, or 19 per cent of all housing tenures.

However, the length of time households were staying in private rented property was increasing, from an average of 4.1 years to 4.4 years.

The report also found that over the past decade, the proportion of 55-64 year-olds in private rented accommodation increased from seven per cent to 10 per cent.


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