29th January 2014
Landlords have been urged to switch to 5 year fixed rate buy to let mortgages before prices rise by a specialist broker.
Mortgages for Business says increased competitive pressures among lenders during the course of 2013 held down the true cost of three and five year fixed rate buy to let mortgages.
But in a report entitled Buy to Let Mortgage Rates: The Real Costs in Quarter Four 2013 identified that three year costs are virtually the same as when swap rates bottomed out in April 2013. It also suggests that five year costs are around 0.1% p.a. higher than then.
Yet three year swap rates have risen by over 0.75% and five year swaps are 1% higher since April last year suggesting that rates could be higher meaning lenders are unlikely to be able to absorb a rise in base rates.
Commenting on the findings, David Whittaker, managing director of Mortgages for Business said: “Competition is set to intensify further still in 2014 – but ultimately lenders will have to recognise increasing cost of funds.
“So whilst lenders’ margins are likely to fall during 2014, it is highly likely that interest rates will rise on medium term fixed rate mortgages reflecting the impending rise in Bank Rate. That is why we maintain our advice to investors to consider taking out five year fixed rate mortgages.”
The report also found that in early 2008 over half of all buy-to-let mortgage products were at 85% LTV and the rest were almost entirely 75%, 80% and 90% products. Today, the dominant product range is now 75% with significant product ranges available at 60%, 65% and 80%. In other words, the product ranges are at 10% lower Loan-to-value points now compared to six years ago so landlords will have to have higher equity to access these rates.
When looking at how much charges such as lender arrangement fees, valuation fees and legal costs) added to the average cost of a buy to let mortgage, the research found that there had been no significant change between the third quarter and fourth quarter of 2013. On average across all products, charges amounted to around 1.5% which when added in to a 2 year loan adds 0.75% per year to the cost over the initial period, 0.5% on a three year product and 0.3% on a five year product.
However, the number of products with no lender arrangement fee crept up to 10.8% in the fourth quarter, up from 7% in the previous two quarters which highlights the increased competition between lenders at the end of the year.
The broker says this is good news, particularly for investors who dislike the idea of arrangement fees and shows that lenders are beginning to take on board borrowers’ preferences. It is encouraging too that the majority of the increase was made at the expense of percentage based fees which now account for 40.2% of arrangement fees, down from 43% in the third quarter. Flat fees made up the remaining 49% down from 50% in the third quarter.