With inflation rising and a possible recession looming, owners close to finalizing fixed-mortgage deals will brace their monthly costs to rise — in some cases by more than double.
The average two-year buy-to-let fixed mortgage deals are up 1.63 percentage points from where they were two years ago, according to Moneyfacts.
The cheapest buy-to-let interest rates are now over 3 percent. This time last year, the cheapest deals charged less than 1 percent.
Rising: With further rise in the base rate expected, buy-to-let rates are expected to continue to rise in the short term
With the future economic climate looking uncertain, landlords preparing to remortgage over the next few months may be wondering whether to hold their new deal for two years, five years, or even longer.
For many, it is a guessing game of whether mortgages will be more or less expensive in a couple of years than they are now.
Whether you take a two-year or five-year deal, the likelihood is that the mortgages available now are going to be much more expensive, says Mark Harris, CEO of mortgage brokerage SPF Private Clients.
What you think will happen to interest rates is also likely to influence your decision when it comes to a remortgage.
If you want a straight forward mortgage, with no principal raise and the lowest interest rate, a two-year fix might be the best fit.
If you anticipate that prices will continue to rise, you may prefer long-term protection in the form of a five-year reform.
Why are the two- and five-year rates similar?
The difference between what someone would pay on a two-year deal and a five-year deal can be minimal.
Virgin Money and Barclays offer the lowest two-year rates in the market for remortgaging property owners, at 3.2 percent and 3.23 percent, respectively.
Those reclassified to five-year deals could get as low as 3.2 per cent with BM Solutions or 3.3 per cent with Barclays.
The reason why the two-year and five-year mortgage rates are so similar is due to expectations about future changes in the base rate by the Bank of England.
This expectation is reflected in swap rates, which have increased dramatically over recent months due to this market expectation.
Swap rates are an agreement in which two parties, for example banks, agree to exchange one stream of future interest payments for another, based on a specified amount.
Mortgage lenders enter into these agreements to protect themselves from the interest rate risk associated with lending fixed-rate mortgages.
Put more simply – swap rates show what financial institutions think the future holds in terms of interest rates.
“A swap rate is actually an agreement between two parties in which one party agrees to receive payment at a fixed rate and the other at a variable rate,” Harris explains.
Lenders are basically hedging their bets against what might happen to interest rates over various periods and an indicator of interest rate expectations.
As swaps go up, so do fixed-rate mortgages usually. Conversely, if they decrease, flat rates tend to follow suit.
Rate effect: Swap rates affected the interest rates charged on two- and five-year fixed mortgages available to homeowners.
While all swap rates have risen significantly in the past three or four weeks, the spread between two-, five- and 10-year swaps has also grown, according to Harris.
He adds: ‘By the time the MPC announces a change to the official base rate, the market has already priced in that expectation.
Current yield curves indicate that markets believe prices will continue to rise in the short term (two years) before falling back.
However, don’t forget that there are other variables that affect the mortgage rate that the borrower actually pays, such as the cash available to the lender in the form of customer savings.
So how long should landlords specify?
Swap rates indicate that lenders believe mortgage rates could start to fall again within the next couple of years, which means that landlords may be wise to fix this term.
‘A short-term product could arguably be taken now with the expectation that cheaper mortgage products will be available in 2024,’ says Harris.
“However, the markets do not always get it right, so you should always act according to your own circumstances, keeping in mind the level of risk you are willing to take.”
Total cost: Although the difference between the rates on a two-year deal and a five-year deal can currently be quite small, borrowers would be wise to factor in the product fee.
The property forum, Property Hub, recently polled its landlord audience and found that 59 percent of them chose five-year products.
‘It is possible that in a couple of years there will be better rates available,’ says Rob Dix, co-founder of Property Hub. However, remortgaging more frequently will result in more arrangement fees, which must be balanced against any savings.
Furthermore, our survey results may show that investors value the certainty of a price fix rather than waiting to see how the market develops.
Ultimately, predicting mortgage rates in two years, five years, or 10 years is anyone’s guess.
Owners will need to consider their goals and expectations when it comes to selecting the exact term on a new deal.
There is some expectation that the spike in inflation may be short and sharp, but it is impossible to predict where rates might go.
“I expect many will be inclined to book longer rather than opt for shorter two-cent deals,” says David Hollingworth, associate director at mortgage broker, L&C Mortgages.
The increases are usually felt more on short term deals, which means there is often little difference in the cost of five year rates compared to two years.
There is some expectation that a spike in inflation could be short and sharp, but it is impossible to predict where rates might go and landlords will need to consider the potential benefit of peace of mind that a longer hold would give.
‘If it’s a long-term investment with a buy-and-hold strategy, I’d suggest a five-year fixed rate,’ says Chris Sykes, technical director at mortgage broker Private Finance.
However, a five-year deal wouldn’t be for everyone, particularly those who might be considering selling within the next few years.
“If there is a risk that they will sell in the next few years, I would suggest a short-term rate,” Sykes adds.
“Some choose short-term tracker rate or fixed rate products due to concern about the government’s rules for leasing properties to obtain an A-C Energy Performance Certificate by 2025, which for some will be a costly exercise.”
Some of the links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to influence our editorial independence.