Thousands of buy-to-let landlords remortgaging now or in the near future will be considering what length of fixed rate deal to opt for in today’s market.
There are many benefits for landlords who choose to lock into a fixed rate mortgage, the main one being that they tend to be considerably cheaper than most lenders’ standard variable rate (SVR). Another major plus point is the increased level of certainty on how much your monthly payments will be.
Many people also choose a fixed rate mortgage as it protects against future interest rate rises, should deals become more expensive. Of course, in the current environment, this is sparking some uncertainty among landlords deciding which fixed rate mortgage to go for.
For a number of years, five-year fixed rates have come with higher interest rates than two-year fixed rates, but they have still appealed to many landlords due to the increased level of certainty they offer. Likewise, some landlords have even opted for longer, 10-year fixed rate mortgage option for added security.
Preference for shorter fixed rate mortgage
Over the past couple of months, according to statistics from Moneyfactscompare.co.uk, fixed rate mortgage deals for mainstream residential mortgages have seen a switch, with two-year fixed rates becoming pricier than five-year options on average.
According to the latest data for June, the average two-year fixed rate is now 5.49%, while the average five-year is 5.17%, effectively incentivising those who want to lock in for longer. By contrast, the average two-year rates in June 2022 was 3.25%, while for a five-year deal it was 3.37%.
Although this hasn’t been reflected in the latest figures for buy-to-let mortgage rates, it shows the shift that is happening in the mortgage market.
However, while you might presume more landlords would be opting for longer-term mortgages now that rates are actually cheaper than two-year ones, new research from Landbay has found the opposite, with growing numbers of landlords play the short game.
Landbay found that around 40% of buy-to-let landlords now plan to take out a five-year fixed rate when they remortgage, which is down on the 46% recorded in December, and a steep drop on the 68% of landlords that said the same last year.
Meanwhile, the two-year fixed rate mortgage has grown in popularity among landlords, with 32% now saying they will choose this when they remortgage, compared with 24% who said the same in December and just 13% in August 2022. The gap is therefore closing in terms of mortgage type preference.
Mortgage rates expected to fall
Many of the respondents to Landbay’s survey expect mortgage rates to fall over the next couple of years, which largely explains why so many landlords are now choosing shorter-term deals so they can take advantage of cheaper rates when the next time comes to remortgage.
The research also found that just 7% of buy-to-let landlords would choose for a longer-term fixed rate mortgage of between seven and 10 years, and just 4% said they plan to go onto a tracker mortgage. This supports the trend of the majority of landlords preferring the certainty of fixed payments for financial planning.
Although inflation is proving more stubborn than many analysts had predicted, the expectation on the whole is that it will be brought under control, and interest rates will come back down as a result.
Paul Brett, Landbay managing director, intermediaries, says: “No one knows where rates will go but many of our survey respondents are hoping to see a fall within two years.
“With more borrowers considering short-term fixed rates when remortgaging, Landbay has listened to the market and [earlier this month] introduced a suite of two-year fixed rate like-for-like remortgage products.
“They come with the added advantage of a lower interest cover ratio stress test to help with affordability.
“As long as landlords are borrowing the same as their current mortgage, the remortgage stress test will be at pay rate plus 1% instead of the standard calculation of pay rate plus 2%.”