The Buy to Let Tracker Mortgage – Yesterday’s News?
If you follow the whims of the International Monetary Fund (IMF), you’ll have noticed last Tuesday (8th October) that they upgraded the UK’s growth forecast for this year. Specifically, they increased it to 1.4%, from 0.9% in July and from 0.7% six months ago, in April. This was despite a modest drop in the global recovery projection due to the weakness of some ‘emerging economies’.
The IMF cited indications of higher business and consumer confidence in the UK as the reason for the generous re-evaluation, and other figures corroborate this. August, a typically quiet month for mortgage lending, saw a surge across the board; home purchase, first-time buyer, buy to let and low deposit mortgage lending all enjoyed a dramatic increase, according to the latest Council of Mortgage Lenders (CML) figures.
Despite the controversy of the government’s austerity measures, and criticism of the mortgage guarantee aspect of Help to Buy (which has already begun, three months earlier than planned), the economy looks to be getting an injection of adrenaline. More money swimming around, and at a faster pace, has an upwards effect on prices; in short, inflation grows. And when inflation grows, interest rates are sure to follow.
What this means for landlords
A growing economy and rising employment reinforces the notion that the Bank of England Base Rate (BBR) might rise as early as 2015. This is good news for savers, who have seen next to no returns on traditional savings accounts for some time. For landlords with heavily geared buy to let portfolios, however, the news is less welcome.
Tracker mortgages have traditionally helped landlords maximise their yields in recent years, benefiting from both lower initial rates and the lowest potential rates at any given period. As the record-low BBR has forced lenders to bump up the fixed differential by three or even four per cent, an interest rate rise could spell the abrupt end of their utility. Furthermore, many reverting rates are also tied to the BBR, meaning that landlords who have let their mortgages ‘tick over’ are also under threat of rising repayments.
2015 may be over 14 months away, but the possibility of a BBR rise isn’t the only thing that should concern borrowers. Afraid that inevitable inflation will eat into their profits, many lenders can cite obscure clauses in their tracker contracts that allow them to widen their fixed differentials in response to ‘market conditions’. Two lenders are ahead of this curve – the Bank of Ireland, who increased the rates on 13,500 mortgages back in May, and West Bromwich Building Society, who followed suit in September for 6,700 buy to let customers.
So is this the end of the buy to let tracker mortgage?
One shouldn’t presume to write off an entire portion of the market, but it seems likely that fixed rate buy to let mortgages will start to look more attractive in the near future. Remortgaging fixes every two or three years can ensure you stay on the best available deal whilst affording you some peace of mind that your rate won’t suddenly skyrocket.
Though recent research from the consumer website Moneyfacts has shown that the number of fixed rate buy to let mortgages on the market has fallen by 21% in the last year, it also showed that the average rate has fallen – from 5.05% twelve months ago to 4.33% now, nearly an all-time low.
Additionally, lenders are loosening their criteria; Santander, for instance, has reduced the affordability rate (the percentage of the outstanding mortgage that a property must fetch in gross rent) on their buy to let mortgage range. Where previously a property had to fetch 7.5% of the outstanding mortgage each year, the figure has shrunk to 6.25%.
If you are uncertain where you stand with your tracker mortgage, you should revisit your mortgage contract or contact your lender; and if you would like to ‘lock in’ to a fixed rate, get in touch with a mortgage broker to see what’s available. Though we can never be sure of the future, it seems likely that, if the BBR starts to climb, we might see buy to let landlords shelving tracker mortgages for some time to come.
By Ben Gosling
TurnKey Landlords is a specialist buy to let mortgage broker with access to the whole buy to let market. They look at the whole picture, including your circumstances and plans for your investment, when sourcing the right mortgage for you.
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