How to avoid the disastrous losses of a bad fixed rate deal

Boost property investment profits with the best mortgage deal

Property investment opportunities have been boosted over the last few years by low buy-to-let mortgage rates. But with expectations of higher inflation, there is growing speculation that interest rates could rise. Property investors are starting to ask if now should be the time to move over to fixed rate mortgage deals.

There is certainly some great fixed rate buy-to-let mortgage deals around. Our recent property investment news blog examined the latest fixed rate deals from the Post Office and Barclays. However, before you rush to fix your interest rate, this article will help you understand the pros and cons of doing so. What looks like a great deal could prove to be a costly mistake, if you don’t weigh up all the advantages and disadvantages of fixed rate buy-to-let mortgages before signing on the dotted line.

Advantages of fixed rate buy-to-let mortgages

The main advantage of fixed rate financing is that it cements your mortgage payments over the term of the fixed rate. There are a bunch of benefits that flow your way when you know what your mortgage payment will be from month to month, year to year. These include:

·         Emotional security

Don’t underestimate the need to sleep easy at night. When you know your mortgage interest rate isn’t going to change, you can relax more easily. It doesn’t matter what the Bank of England does with the base rate; your mortgage costs are fixed. If you’re worried about interest rates rising, a fixed rate mortgage eliminates that worry.

·         Budgeting

Some of the best property investment opportunities are all about the capital growth, not rental income. If this is your investment goal, then negative cash flow could make you a wealthy investor. You could benefit from a fixed rate buy-to-let mortgage by fixing the level of negative cash flow. You’ll be able to budget more easily as you move towards your forecast profit.

If your investment objective is rental income, investing with a fixed rate mortgage will help you by providing greater certainty of costs. The mortgage is likely to be your largest expense. If you know how much this is in advance, you’ll be more certain of the net income flowing into your pocket. That makes personal budgeting easier.

·         Rental flexibility

You’ve got great tenants, and don’t want to lose them. A fixed rate mortgage will improve your flexibility with tenants. You won’t have to increase rents as high as you might need to otherwise. If your interest payments rise, to maintain your profit margin you’ll need to increase your rent. What if your great tenant can’t afford the new rent? He might look elsewhere, and you’ll be left with a costly void period between tenancies. A fixed rate deal gives you the flexibility to keep rent unchanged or increase by a lower amount than you might otherwise need.

·         Fixed rates can skyrocket your income

On the other hand, when you do raise rents, a fixed rate of interest will result in a larger net income. Let’s say you own an investment property with monthly rental income of £1,000 and mortgage interest payments of £600. Other costs amount to £200. Your monthly profit is £200.

Now, let’s assume that you increase the rent by, say, 2% per year, and your other costs increase by the same amount. In ten years, your other costs will have increased to £244 per month. Your rental income will have increased to £1,219. Your rental profit will now be £375 per month – that’s the same as giving yourself a 6.5% pay rise every year for ten years.

Fixed rate deals longer than five years could also help you borrow more. It is because the lender can relax the ICR rules. This rule means you’ll need to cover the mortgage payments by as much as 145% with rental income. Long-dated fixed rate deals can be backed by rental and personal income, effectively increasing the amount a lender can advance.

Disadvantages of fixed rate buy-to-let mortgages

Before you get carried away with the numerous advantages of fixed rate deals, pay heed to the disadvantages. These include:

·         Your credit record counts for more

Generally speaking, lenders are stricter with their requirements for fixed rate deals. The best deals will only be available to investors with great credit scores. If you haven’t got the credit score the lender needs, not only will you not get the fixed rate deal you wanted, but the mortgage application you made could further dent your credit score.

·         You won’t benefit from lower rates in the future

If interest rates drop while your fixed rate is in place, your mortgage payments will remain unchanged. You could end up paying more than you would otherwise be paying. Your profit won’t be as great.

·         Refinancing or early sale could be costly

If rates do fall, to take advantage of them you’ll need to refinance. It could be expensive, as could selling your investment property before the fixed rate period ends. Fixed rate deals usually come with hefty early repayment penalties. You’ve got to be sure that you won’t want to sell before the end of the fixed rate period before you apply for the mortgage. Otherwise, your property profit could be destroyed.

·         You could be in for a shock at the end of the fixed rate term

If interest rates have increased during the fixed rate term, you could be in for a nasty shock. The interest rate you pay will revert to the lender’s variable rate, and that could be quite a bit higher than your fixed rate. For example, the interest rate on the Post Office’s two-year fixed rate buy-to-let mortgage is 1.75%. At the end of the fixed rate term, the interest rate rises to its variable rate, which is currently 4.74%. On a £150,000 mortgage, your mortgage interest payments will rise from £219 per month to £593 per month. If interest rates rise before the end of the fixed rate term, your mortgage payments will be even higher. This extra cost could be a big shock to your investment finances and cash flow.

Will a fixed rate buy-to-let mortgage skyrocket your profits?

Figuring out which is the ideal buy-to-let mortgage to take advantage of the best UK property investment opportunities is never as easy as simply looking at the interest rate. You’ll need to consider the lender’s fine print. Some products are available with valuation and legal fees paid. Others have high product fees. Fixed rate buy-to-let mortgages could cost a small fortune if you need to sell before the fixed rate term ends.

You’ll also need to consider your investment aims, timescale, and tax position. The mortgage for you will dovetail with all of these.

I’m not saying that fixed rate buy-to-let mortgages need to be avoided, but you do need to consider all the pros and cons, as well as the mortgage clauses, before making your financing choice. A fixed rate mortgage could give you emotional security and known fixed costs – but it could also come at a price you don’t yet foresee.

Contact one of our team today on +44 (0)207 923 6100, and we’ll help you find a mortgage broker who understands property investment. They’ll be able to find the perfect mortgage for your individual circumstances and investment objectives.

Live with passion

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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