Landlords should fix now

Research from Mortgages for Business found that increased competitive pressure during the course of 2013 had held down the true cost of 3 and 5-year fixed rate buy to let and that 3-year fixes are virtually the same as when swap rates bottomed out in April 2013.

The research also found that 5-year costs are around 0.1% p.a. higher than then they were in April 2013. However 3-year swap rates have risen by over 0.75% and 5-year swaps are 1% higher since April last year.

David Whittaker, managing director of Mortgages for Business, said: “Competition is set to intensify further still in 2014 – but ultimately lenders will have to recognise increasing cost of funds.

“So whilst lenders’ margins are likely to fall during 2014, it is highly likely that interest rates will rise on medium term fixed rate mortgages reflecting the impending rise in Bank Rate.

“That is why we maintain our advice to investors to consider taking out five year fixed rate mortgages.”

The report also found that in early 2008 over half of all buy to let mortgage products were at 85% LTV and the rest were almost entirely 75%, 80% and 90% products.

Today, the dominant product range is now 75% with significant product ranges available at 60%, 65% and 80%. In other words, the product ranges are at 10% lower LTV points now compared to six years ago.

When looking at how much charges (such as lender arrangement fees, valuation fees and legal costs) added to the average cost of a buy to let mortgage, the research found that there had been no significant change between Q3 and Q4 2013.

On average across all products, charges amounted to around 1.5% which when added in to a 2 year loan adds 0.75% p.a. to the cost over the initial period, 0.5% on a three year product and 0.3% on a five year product.

However, the number of products with no lender arrangement fee crept up to 10.8% in Q4, up from 7% in the previous two quarters which highlights the increased competition between lenders at the end of the year.

This is good news, particularly for investors who dislike the idea of arrangement fees and shows that lenders are beginning to take on board borrowers’ preferences, (that’s not to say that the lenders won’t build in this lost margin elsewhere in the product).

It is encouraging too that the majority of the increase was made at the expense of percentage based fees which now account for 40.2% of arrangement fees, down from 43% in Q3. Flat fees made up the remaining 49% down from 50% in Q3.