However, not all of the news is negative and in a recent article I mentioned the fierce competition between lenders that is driving down the costs of buy-to-let borrowing.
This trend has continued and a recent article by the Financial Times declared that interest rates on buy-to-let mortgages are getting closer to those offered on residential products. The article, which was published in mid-November, pointed to data from finance website, Moneyfacts, which showed that since the beginning of the year, the difference between buy-to-let and residential rate has shrunk from 0.76% to 0.62% based on average rates charged for a 2-year fixed mortgage at 75% LTV.
According to the Buy-to-Let Mortgage Index, which is published by the broker, Mortgages for Business, the average 2-year fixed rate mortgage in Q2 of this year was 3.09%, which was down from 3.14% the previous quarter. While the average 5-year fixed rate was 3.51%, which was down from 3.58% the previous quarter.
Amidst these average rates, buy-to-let lenders are increasingly launching very eye-catching deals. At the time of writing, Accord Mortgages, for example, was offering a 2-year fixed rate buy-to-let mortgage up to 75% LTV at 1.65 and Santander had cut the rate on a 5-year fixed rate buy-to-let mortgage up to 60% LTV, to 1.79%.
This competitive rate environment presents an interesting opportunity for buy-to-let landlords, and also something of a conundrum.
At the beginning of 2017, the Prudential Regulation Authority (PRA) introduced new underwriting standards for buy-to-let mortgages, which included stricter stress testing for affordability. The PRA said that a lender should consider the likely future interest rates over a minimum period of five years from the expected start of the term of the buy-to-let mortgage contract, unless the interest rate is fixed or capped for a period of five years or more from that time. Consequently, the popularity of 5-year fixed rate buy-to-let mortgages rocketed as they enabled landlords to achieve maximum leverage within the parameters of the new regulation.
At the time, the average buy-to-let 5-year fixed rate mortgage was 3.77%, according to the Buy-to-Let Mortgage Index from Mortgages for Business – which is more than 0.25% more expensive than the average cost of a 5-year fixed rate today.
This means there are many landlords, of whom you may be one, who are currently paying a more expensive rate for their mortgage than they would be able to achieve today, but who are also tied into a 5-year fixed rate, with the prospect of having to pay Early Repayment Charges (ERC) in order to benefit from the current low rate environment.
So, is it worth paying the ERCs?
Unfortunately, there is no simple answer to this question as every situation will be different, depending on the existing rate, the size of the loan, the level of any ERCs and the new rates that are available.
Fortunately, there is an easy way for landlords to find the answer for their own circumstances, with the launch of new technology platforms that have been developed to take the strain of managing a portfolio.
So, for example, with the right platform you could input the details of your portfolio and be automatically updated on remortgage opportunities, alerted when your special deals are about to expire, and receive research and analysis on when it might be best to move, what rates are achievable, and what this might mean to the profitability of your portfolio. The technology also exists to calculate the potential savings after any penalties, such as ERCs, and product fees have been paid and so this means you can easily see whether it is worth remortgaging in advance of the expiration on your fixed rate.
As a landlord, the key for you to make the most of your investment is to be proactive and continually look for opportunities to optimise your spending. By taking a passive approach you can miss the product transfer date when your mortgage switches on to the lender’s standard variable rate and you can miss remortgage opportunities that may present a better rate or way of refinancing across a portfolio.
The problem is that, for most landlords, a proactive approach can be too time consuming to be practical, but this is no longer the case. With a technology platform, like the one we offer at Lendlord for example, you can actively manage your portfolio without spending any more time on doing so. Simply input the data once and the platform will alert you when it's time to do something to improve the performance of your portfolio. This approach means that, having endured months of bad news for buy-to-let landlords, you can start to benefit from the good news.
