Landlords

Should you fix your buy-to-let mortgage rate?

Valentina GolubovicValentina Golubovic
Last updated on:
August 30, 2022
Published on:
August 23, 2022

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The last few years have been a whirlwind. While we were still recovering from the implications of COVID-19, the outbreak of war in Ukraine has slowed that recovery way down. The restricted supply of gas as a result of the war, as well as supply constraints everywhere else due to the effect of COVID-19, has caused prices to rise very quickly.

What is inflation?

Inflation is when the cost of living rises, which means you need more money to buy things like food, clothes and household goods. It is the rate at which the price of goods or services increases in our economy.

The bank of England has a target rate of 2% for inflation to ensure our economy is functioning at its optimal. While the current inflation is at 10.1%, the highest in 40 years, it is expected to rise to 13%.

Why are we experiencing high inflation?

The outbreak of the war in Ukraine has restricted the supply of gas. This has had a ripple effect on other areas of our economy. As well as, the demand for goods and services is outweighed by the supply, also causing prices to rise.

Interest rate forecast

One way in which the government can combat high inflation is by increasing interest rates. This is used to slow down demand and spending in our economy, bringing the price of goods down. As interest rates rise, debt becomes more expensive therefore, the demand for goods falls.

Interest rates have been hiked to 1.75%, the highest since the global financial crash, and the average mortgage rates have also passed the 4% rate. The base interest rate is expected to rise as economists have reported their predictions for the next few months.

Rising rates, bigger mortgages and longer payback terms mean even small changes in interest rates can significantly raise the cost of your mortgage, which is why you should choose carefully if you're due a remortgage or wish to take one out.

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Fixed-rate mortgage

A fixed-rate mortgage is the most traditional type of home loan. With a fixed-rate mortgage, you agree to pay the same monthly payment for the duration of your fixed term, which includes principal and interest.

Reasons to fix your rates

Budgeting

If you have a variable rate mortgage, you could find that your monthly payments will vary according to the base rate and movements in the Bank of England base rate. This can create uncertainty if you’re unsure how much you’ll pay each month. By fixing your mortgage, you can ensure that your monthly payments will be fixed for the duration of the agreement. You don’t need to worry about unexpected increases in repayments due to interest rate changes.

Reduce payments

If interest rates rise and you have a fixed-rate mortgage, you protect yourself from the increased costs and therefore benefit from relatively lower mortgage rate prices. However, interest rates can also fall, and you could be paying more in this instance than an individual on a variable-rate mortgage.

Variable-rate mortgage

The interest rate on a variable-rate mortgage can change as often as monthly, quarterly or even annually. This means that your monthly repayments can change.

Standard variable rate mortgage

Standard variable rate (SVR) mortgages vary from lender to lender. Your mortgage provider decides their SVR, which can change. Unlike a tracker rate mortgage (see below), if the base rate falls, that doesn't necessarily guarantee that your provider will lower its SVR. It can remain the same. SVR mortgages don't have a fixed lock-in period like a fixed-rate mortgage does, so you can essentially change whenever you feel like it.

Tracker rate mortgage

A tracker rate mortgage usually tracks the Bank of England's base rate plus a fixed rate %. It usually offers a lower interest rate than a standard variable rate mortgage, but if rates rise, you can expect to pay more.

Discounted variable rate mortgage

A discounted variable rate mortgage is a mortgage provider's variable rate plus an additional discount. To obtain the discount rate, you would need to fix it for a specified duration.

Advantages of a variable rate mortgage

Depending on which type of variable rate mortgage you opt for, the impact on your payments may vary.

Reduce costs when rates are falling

When rates fall, you can benefit from a lower rate than those in fixed-rate mortgages. Depending on which type of variable rate mortgage you opt for, the impact on your payments may vary. Whether your costs fall also depends on if your mortgage provider decides to lower its rate, so a fall in cost is not always guaranteed.

Flexibility

One of the biggest advantages of an SVR mortgage is flexibility. Fixing your mortgage rate with a 20-year duration can be stressful. Our economic landscape can change drastically in 20 years, mortgage interest rates might fall drastically, or you might decide to sell the house and be forced to pay the early repayment charge. Either way, these unplanned events can increase costs for you in the future.

Which type of mortgage rate is best for you?

If your buy-to-let mortgage term is soon expiring or you are currently up on an SVR, it might be best to consider a fixed-rate term. Economists expect rates to rise further, and the expected rate hikes are already being priced in by mortgage lenders, yet no one has a magic ball that will predict the future of where interest rates will be or how long one should fix for. If flexibility was the main reason you opted for a tracker rate or an SVR mortgage, fixing now for several years might result in regret further down the line if things recover quickly.

The rate you are offered will depend on the property value, mortgage amount as well as term. Some options could be viable in lowering your monthly payments. The rate you are offered will depend on the property value, mortgage amount as well as term, so consider getting an adviser to help you pick the best mortgage suitable for you or speaking to a mortgage broker. If you are considering taking out a mortgage, increasing your deposit amount by setting a saving goal or exploring government schemes can also help to offset those high rates.

The opinions on this page are for general information purposes only and do not constitute legal or financial advice on which you should rely.

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