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Category: buy to let mortgages

Results from a survey by a leading specialist mortgage lender, Landbay, have revealed that landlords in the Private Rented Sector (PRS) – particularly those with larger portfolios – prefer five-year fixed rate mortgages.

Previous survey results also strongly indicated landlords’ preferences for products with longer terms. This year, the pendulum has swung further into the longer term camp, with five-year terms coming out firmly on top.

Why are five-year fixes so popular?

The news that five-year fixes are in high demand may not be shocking news: they have always been a popular choice for landlords. But what exactly makes them more appealing than the alternatives? 

Many landlords prefer the stable, monthly payments. The interest remains constant for the entire initial rate period, unaffected by interest rate fluctuations. This allows investors to plan ahead and budget confidently.

Affordability is also a big factor. On a two-year fixed rate, the affordability calculation a lender will use is typically much stricter than for a five-year fixed rate. This can mean the rental income is not enough to show the lender that the mortgage is affordable to the applicant.

For this reason, some landlords find that whilst their preference is for a two-year product, they have to go for a five year deal to get the loan they need.

Five-year fixes are also especially popular among landlords with large portfolios of 20 properties or more. An even larger majority apply for these mortgages via limited companies.

The impact of the change in government

It may be hard to believe how quickly the time has flown by, but a month has passed since Labour came into power. They have yet to deliver many of their housing sector reforms, and there is still much uncertainty about how their other proposed policies will impact landlords.

As such, landlords may view longer-term fixes as a pillar of stability in a changeable period. 

Despite the lack of confidence Labour inspire in landlords, there have been positive signs that the PRS is stabilising, with reports of high rental yields and property prices levelling out.

Popularity of other mortgage terms

Landbay have found that products with even longer initial rate periods attached, such as seven-year fixes, are also slightly more prevalent than in previous years, though the percentage of landlords that go for these products is relatively small. 

In turn, fewer landlords are opting for two-year fixed rate mortgages, compared to previous years.  These products still have a very solid audience, as some landlords find shorter initial rate periods offer them the flexibility to make changes more quickly. 

Last year, with rates climbing, a two-year fix was a useful temporary hold-over for some landlords until rates come down. 

It isn’t yet clear when mortgage interest rates will come down to any great extent. Over the last few months, the mid-term projection for inflation and the Base Rate have improved, but the economy is still changeable. 

Fixed rates vs. variable rates

As well as the length of mortgage deal periods, the continued popularity of fixed rates over variable rates is notable. 

In light of UK inflation stabilising and the Base Rate decrease, some PRS experts felt tracker rate mortgages would be in higher demand. Where a mortgage interest rate is tracking the Base Rate, and the Base Rate comes down, monthly mortgage payments also decrease.

In reality, fewer landlords are opting for tracker rates, according to the survey. This information surprised Landbay’s sales and distribution manager Rob Stanton, who said:

It is interesting to see a decline in demand for trackers, particularly as we enter a period where we could see further movement on base rate, and in turn on mortgage rates.

This, along with a small increase in demand for longer-term fixes may highlight that some landlords are still a little way off from remortgaging and are hoping to make their move during more favourable market conditions.

At Commercial Trust we are here to help landlords choose the most suitable products in keeping with the current economy and available rates. Call our team of expert advisors on the number above, if you need professional assistance in getting the right mortgage.