Should Landlords Lock Into A Five Year BTL Deal? | moneyfacts.co.uk

Derin Clark

Derin Clark

Online Reporter
Published: 29/09/2020

Since August the average rates on 60% and 80% loan-to-value (LTV) buy-to-let (BTL) mortgages have been rising, here we look at by how much rates have risen and whether landlords would be better off locking into a five year deal or a two year deal

Average BTL rates rising

Our research has found that since August the average rates on 60% and 80% BTL mortgages in both the two and five year fixed charts have been rising. The average two year fixed rate at a 60% has risen by 0.17%, from 2.35% at the start of August to 2.52% today, and in the five year fixed rate chart the average rate at 60% has increased by 0.18%, from 2.73% to 2.91%. Average rates at 80% LTV have also risen, with the two year fixed rate increasing by 0.47%, from 3.51% at the start of August to 3.98% today. Meanwhile, in the five year fixed chart the average 80% LTV rate increased by 0.46%, from 3.82% to 4.28%.

In addition to this, as the below chart shows, average rates on both 60% and 80% LTVs are significantly higher at the beginning of March, before the Coronavirus pandemic began impacting the UK economy. The average 60% LTV rate on a two year fixed deal is now 0.63% higher and 0.60% higher on a five year fixed deal. At an 80% LTV, the average two year fixed rate is 0.42% higher and the average five year fixed rate 0.30% higher.

 

BTL average rates
  March 2020 July 2020 August 2020 September 2020 28 September 2020
BTL two year fixed - 80% LTV 3.56% 3.18% 3.51% 3.98% 3.98%
BTL two year fixed - 60% LTV 1.89% 2.28% 2.35% 2.45% 2.52%
BTL five-year fixed - 80% LTV 3.98% 3.82% 3.82% 4.27% 4.28%
BTL five-year fixed - 60% LTV 2.31% 2.65% 2.73% 2.80% 2.91%

 

As rates on BTL are clearly rising, we look at whether landlords should consider locking into a five year fixed rate deal now or a two year deal with the hope that rates will start to fall again.

Should landlords lock into a five year BTL deal?

Although average rates on BTL deals are clearly rising, whether they continue to rise remains uncertain. Firstly, base rate is currently at a historic low, with the ongoing possibility of a negative base rate by the end of this year or at the start of 2021. With base rate so low, and maybe cut even further, it is unlikely that mortgage providers will be raising mortgage rates significantly in the foreseeable future. As well as this, swap rates, which is one of the factors mortgage lenders use when setting fixed rates, have remained low since March with the difference between two year and five year swap rates remaining small.

Saying this, the current economic climate is highly unpredictable, which means that mortgage lenders are far more cautious about lending than they were at the beginning of 2020. This means that they could continue to increase rates in the short-term in order to hedge themselves against possible future losses that could incur due to repayment defaults and repossessions.

With the gap between five and two year fixed rates low at the moment, landlords should consider a range of factors when deciding whether to lock into a five or two year deal and not simply look at the rate. For example, as a BTL is normally a long-term investment, landlords may consider the stability of knowing the mortgage rate for a five year period to be a better option, but landlords also need to consider the risks involved if rents fall in the next two years, which has happened in London over the last six months, and how this will impact their return on investment if rents fall but mortgage repayments remain the same.

As Eleanor Williams, finance expert at Moneyfacts.co.uk explained: “While rates are rising, those landlords wanting to capitalise on the current level of demand and the possible savings available via stamp duty relief before this expires at the end of March, may decide to explore their options before rates potentially increase even further. However, those considering investing or refinancing may wish to carefully plan and ensure that they protect any investments. In these ever-changing times, the advice and support of an independent, qualified professional continues to be vital in ensuring the right choices can be made.”

Disclaimer

Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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