Look at the big picture
Looking at the big picture first, and with so many homeowners currently on fixed mortgages, it will take time for the effects of these increases to kick in and those homeowners will breathe a sigh of relief for now. For example, those who fixed last year for five years will not feel the effect on their mortgage for many years.
Inflation can have some benefits for landlords, such as higher tenant demand from those delaying a purchase. Inflation can cause average house prices to rise, which could mean higher future property values, but many experts believe property values could fall. Those homeowners with a mortgage could see inflation reduce the real value of their buy-to-let loans.
Some downsides of inflation can be an increased likelihood that tenants will be unable to pay their rent if utility and household bills continue to rise. Many landlords will feel responsible for helping tenants ease the cost of living crisis and some landlords may temporarily freeze rents. The cost of maintaining the property can increase, and many homeowners may need to spend money on energy-saving upgrades.
BoE base rate hikes will affect mortgage rates.
The average buy-to-let fixed rate towards the end of August was around 4.03% for a two-year fixed rate and 4.19% for a five-year fixed rate and was changing/rising rapidly .
The impact of new mortgage rates and the prospect of further increases may make investors think twice, especially if they’re betting on a mortgage-heavy buy. This is partly due to the change in the buy-to-let tax relief, which has already taken full effect.
For most homeowners, real estate investing is a long-term strategy and rates will fluctuate over the life of the mortgage.
In these difficult economic conditions, it is important that owners are better prepared than ever.
Act quickly before the end of your CDD
For homeowners whose fixed rate mortgages are up for renewal in the next 6-9 months, it’s important to act quickly. While the new rate will likely be higher than your current product, we expect further increases to follow in the fall.
Speak to an independent mortgage broker to get an objective view of the products currently available.
Check the rate you are currently paying and the penalties you may incur for prepaying your current fixed mortgage. Speak to an independent broker to calculate whether it’s worth considering “pay now” to potentially save in the future. Mortgage rates are expected to continue to rise. Therefore, securing a rate now, before possible further increases, can give you assurances over the next 2-3-5-7-10 years, for example.
Consider your plans if considering long term fixed rate products
Although long-term fixed rate mortgages currently seem attractive, it is important to consider whether you want to pay off your mortgage during the fixed rate period. If so, you may face significant prepayment charges. Think about how long you can have the mortgage in place.
Consider overpaying your mortgage
If you have the funds available and enjoy lower rates, you may want to consider overpaying on your mortgage. Not only will this reduce the pot to which interest is applied, but the current rate will most likely be cheaper than the rate you are likely to switch to in the future. This will help you get used to paying more when it comes to refinancing your lower mortgage balance. In some scenarios, this can help with the loan-to-value band when your current rate ends and you refinance or switch rates.
In many cases, policyholders can pay up to 10% per annum without incurring mortgage prepayment penalties during the fixed rate period. However, check your policy’s prepayment clauses and speak to a specialist for advice tailored to your situation. Talk to your accountant about the pros and cons of overpaying on your mortgage.
Noticeable impact on buy-to-let mortgage stress test
When applying to buy to let, mortgage lenders typically apply a stress test that takes into account your ability to pay a higher interest rate in the future. The stress income coverage ratio is the calculation lenders use to determine your affordability of a buy-to-let mortgage. Higher interest rates/mortgage rates come with higher stress test rates on the interest you will pay on your mortgage, which may impact your mortgage capacity. Speak to an independent mortgage broker to discuss how much you can borrow, as you may not be able to borrow as much as you did last time.
As we approach the end of the summer, we are seeing a slowdown in the real estate market in certain regions. With the current cost of living, rising interest rates and the expense of selling or buying a property, many people are rethinking their plans. Going forward, it will be important for landlords to carefully budget their short-term and long-term property costs.
* Adrian Anderson is a director of a real estate finance company Anderson Harris *
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