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Landlords brace themselves for higher rates with longer term fixes, brokers say

  • 09/03/2022
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Landlords brace themselves for higher rates with longer term fixes, brokers say
Brokers are seeing more landlords seek to fix their buy-to-let mortgages on longer terms as further rate rises loom.

Lenders are also responding to this trend, with the most recent being Keystone Property Finance. This week, it launched seven-year fixed deals which it said was in response to landlord demand.

Elise Coole, managing director of Keystone Property Finance, said landlords were, “wanting the long-term security that a seven-year fixed rate provides”.

She said: “Given that the Bank of England has increased interest rates twice since December. It looks increasingly likely that we will see further rate increases in 2022 if inflation continues to run well above the Bank of England’s two per cent target.”

“That is something we hear is genuinely keeping some landlords up at night.”


Landlords facing tighter margins

Gary Hemming, commercial lending director at broker ABC Finance said it had seen a “big uptick” in the number of landlords looking at securing longer-term fixed-rate deals. 

Hemming said many were facing tight margins on their portfolios as rates increased. “Ultimately, unless this has been well managed from the start, to create a robust business, then interest rate rises are likely to represent a real threat to the future of their portfolios.

“Even the strongest portfolios have a tipping [point] where interest rates start to cause a problem, hence the flight to fix costs in the current climate,” he added.

Toby Fields, director at Langley House Mortgages, said longer term fixes appealed to landlords who opted for a very ‘hands off’ approach when it came to letting their property.

He said: “The 10-year fixed rate option allows them to do just that. Landlords will need to be aware that the early repayment charges are higher than on shorter term fixed rates but without plans to sell the plan property, this shouldn’t be an issue. However, I believe there will always be a need for an element of flexibility within a product so I would expect five-year options to still be as popular even if the interest rate is similar for the majority of landlords.”


Smaller landlords looking for longer fixes

Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said he thought it was the less experienced smaller landlords seeking the longer term deals.

He said: “More seasoned landlords may want to keep their funding agile, in case they want to raise funds to make a new investment.”

He added that changes to the rules around rental property, including the minimum Energy Performance Certificate rating requirements might make some landlords hesitant to commit to a longer term fixed rate.

Taylor-Barr said: “At the moment many are having to look at raising money through remortgages to fund the required improvements to meet the minimum EPC rating, or sell the older properties and look to buy newer builds – things that will be more difficult and expensive if they are tied into longer term mortgage deals.”


Volatility of interest rates

Ian Hewett founder of The Bearded Mortgage Broker, said: “I am dealing with a couple of experienced landlords currently, who historically were always keen on short-terms deals.

“However, due to the potential volatility of interest rate rises and the cost of living increases, they want to explore the mid to longer-term options to look at their return on investment.”

He added: “With some of the lenders really ramping up their fees, you really do need to look at the overall costs over the period of the term to ensure it is the right option for the client.”


Demand for longer term fixes growing

Nicola Arbon, managing director at The Mortgage Hut said landlords were looking for longer term stability now that rates appeared to be rising.

She said: “We have seen an increase in enquires from buy-to-let landlords for fixed rates for longer than two years as they are having their profit eroded by higher finance charges and looking for extended terms to provide some stability.”

Arbon said professional landlords wanted to be able to budget and plan for the long-term and many were of the opinion that rates will continue to rise steadily over the next few years.

“Add to this the cost of remortgaging every few years and it’s easy to see why the demand for longer term fixed rates is growing,” she added.


ICR requirements impacting decisions

Lewis Shaw, founder of Shaw Financial Services, said the rise in long-term fix deals for buy-to-let landlords was also related to interest ratio coverage (ICR) calculations. 

“When buy-to-let lenders underwrite buy-to-let loans, the rental income is stress tested to ensure that it meets ICR calculations. On longer-term, fixed rates, the ICRs are lower as the Financial Conduct Authority only needs to stress for five years. So if you’re taking a two-year deal, the stress test is more severe for the three years you’re not in a fixed rate and on a standard variable rate. Hence why you can borrow more on a BTL basis if you’re taking a longer-term fix.” 

“Now, because prices have risen so quickly and rents haven’t kept up, this has meant that landlords need to borrow higher mortgage values but without the necessary rental coverage, and therefore, a long term fix solves this problem,” he added.

He gave the example of a £200,000 property for which a mortgage was needed at 75 loan to value (LTV), or £150,000.

He said the ICR on a typical two-year fix would be 150,000 x 1.45 x 5.5 per cent/12. This meant the rental income needed to consider BTL self-financing would have to be a minimum of £997 per month .

The ICR on a typical five-year fix for the same mortgage would be calculated at 150,000 x 1.25 x 5 per cent/12 meaning a minimum of £782 rent a month would be needed.

“Therefore if the rental market in the area is saying that the maximum you can rent said property out for is £850, you would need to get a five-year deal so the stress test is lower, unless you had the income to top-slice and make up for the shortfall between the rental income and the ICR on a two-year if the lender allows top-slicing.

“In short, with rising prices and rents lagging behind longer term fixed rates for BTL landlords will become the norm, and they are needed to give some semblance of order to the under-regulated BTL market.”


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