In for the long haul

Mike Taylor

October 18, 2021

Mike Taylor is head of marketing, products and savings at Mansfield Building Society

The demand for privately rented properties continues to outstrip supply in many areas of the country. That’s a sentence we’ve heard countless times over the last ten years or so, and it still holds true.

According to recent research by Propertymark, void times have decreased 30% since the beginning of 2021 and in August stood at just two weeks.

But it’s not just demand that makes investing in the private rental sector an attractive proposition. Buy-to-let mortgage rates are at an all-time low too, in part because bank rate stands at an almost inconceivable 0.1% and because competition between lenders is fierce.

In September, Moneyfacts reported that the average 2-year fixed rate stood at 2.94% with 5-year fixed rates averaging 3.25%.

With such keen pricing, and with 5-year fixed rates so close in price to their shorter-term counterparts, it’s not hard to see why they have retained their popularity.

Just how long this sweet spot will last is anyone’s guess. There’s an awful lot of quantitative easing to repay, inflationary pressures abound, and swap rates are on the up which points towards mortgage rate rises in the medium term.

Add to this a harsher tax regime for landlords borrowing in a personal capacity, changes in regulation and restrictions on evictions throughout the pandemic, and, like all things, the situation is more complex than at first glance.

It’s been five years since the Prudential Regulation Authority (PRA) introduced stricter underwriting standards for buy-to-let mortgage contracts.

This means that many landlords who took out 5-year fixed rates just before the standards took effect will now be eligible to refinance without incurring early redemption charges.

Unless they are planning to sell, I would expect most of them will choose to lock in again for another five years, not only because the rates currently on offer in the market are so low but also because of the PRA guidelines around interest rate affordability stress tests.

The guidelines ask lenders to take account of likely future interest rate increases over a minimum 5-year period unless the mortgage interest rate is fixed for five years.

The PRA states that if the mortgage term is less than five years, the lender should use a stress test of 5.5%. With current buy-to-let mortgage rates well below this notional figure, it’s not hard to see why 5-year fixed rates can be a tempting alternative for landlords especially those who have property with lower rental yields or who want to borrow more against higher value properties, particularly in areas where house price inflation is accelerating faster than rental income.

As you might expect, 5-year fixed rates remain popular with portfolio landlords – those who have four or more mortgaged properties – and at The Mansfield we lend to landlords with up to 15 properties owned either in a personal capacity or held in a Special Purpose Vehicle (SPV) limited company.

Brokers will of course know that these investors are unlikely to qualify for the lowest rates due to the complexity of the borrower’s circumstances, so they will have to shop around to find a lender that can accommodate complex propositions.

They may even find that the sourcing tools can’t handle the level of detail required to find an appropriate solution. That’s where the phone, email and good relationships between lender and broker bear fruit.

Our current product suite includes a 5-year fixed rate buy to let mortgage assessed at a pay rate of 3.39%. It’s not the lowest in the market, but brokers are recommending it to their clients because our lending criteria means that it works well for landlords with complex propositions.

And it has a flat completion fee of just £1,300 which is great for larger loans. With many fees out there based on a percentage of the loan amount, often up to 2%, it’s certainly a good choice.

Looking ahead, it may not be long before rates do begin creep back up again although in today’s economic climate it’s hard to predict for certain.

Taking on a mortgage that’s fixed for five years could provide landlords with some certainty in uncertain times, allowing them to ride out what could be a bumpy period.

If I were a broker, I’d be doing a ring-around to all my clients nearing the end of their ERCs to discuss why 5-year fixed rates are looking particularly attractive in the current market.

And in that call, it’s worth mentioning that The Mansfield offers a solution that can help prevent them from being stuck on SVR if their rental income is not enough for typical stress rates.

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