By Bob Lawless
As an independent Mortgage Broker I work on behalf of my clients, not the lender. In this article I look at the costs of fixed rate loans compared to lower rate discounts. The Chancellor of the Exchequer, Gordon Brown, feels that borrowers should not be so conscious of short-term low, mortgage rates; but opt for long term fixed rates. What is Long Term? In financial services terms investments should be in place for at least the medium term which is, in my opinion, five years. This normally allows the investment time to show a return even when growth may be hampered by unexpected influences. Anything over five years I consider long term. However, when it comes to mortgages a ‘normal’ term is 25 years and five years but one fifth of that. So long term I would suggest is 10 years plus.
Why are borrowers so reluctant to take fixed rates for five years let alone 10? Several factors come into play in the residential market place, eg:
• Purchasers move home on average between three and eight years in the UK. A long term fixed rate may not be suitable if the loan is not portable to a new property (the outstanding loan is effectively ‘moved’ to the new property and any additional borrowing needed is taken at the same time via the lender. The loan is NOT reduced since this would normally trigger a redemption penalty.)
• Budgetary considerations also come into play. Many fixed rate loans are at a higher level of interest than, say, discounted or tracker rates and borrowers are reluctant to commit to what they consider an over spend (and yet those same borrowers can become extremely emotional as soon as the interest rate rises by 0.25%!!)
• Personal circumstances can change at any time, eg divorce, and the last thing couples want is to find they are committed to paying redemption penalties, amounting to several thousands of pounds, at a very difficult time when both partners are extremely budget conscious
• First time buyers are often stretching their budgets to the maximum in order to get onto the property ladder and discounted rates are very attractive to them
• Often borrowers are not told by brokers that they can split the total loan and have some at a fixed rate and some at, say, a discounted rate – the best of both worlds as it were. One can understand that at a time of low interest rates (the lowest for nearly 50 years) combined with relative stability in our economy borrowers may prefer to take a short term low rate, monitor interest rates and when they feel they are rising too much to ask their mortgage broker to analyse the savings they could make over the rest of the mortgage term by switching or remortgaging to a fixed rate product.
However, for the Buy To Let (BTL) market do the same ‘rules’ apply? There are several differences that should be taken into account, eg:
• Investors are not looking to sell the property in the short term; but look to realise a gain over the longer term via a combination of rental income and capital growth
• Investors are able to increase rents on an annual basis
• Larger deposits are often available to investors and the larger the deposit the less risk the lender is taking and that can mean a lower interest rate
• Personal circumstances may change, eg divorce; but the BTL portfolio does not necessarily need to be sold thus avoiding redemption penalties
Based upon the above, long term fixed rates may have a part to play in the BTL arena. Let’s look at some comparisons between fixed and variable rate products. Of the 7,794 mortgage products I had access to in mid January, 18% were fixed (1,424). Borrowing £70,000 interest only over 25 years; can fixed rates mean paying less?
• Three year discounted rate charging 0.99%. Total interest £97,697.
• Two year fixed rate at 2.35%. Total interest £94,544. Saving £3,153 and yet most borrowers would dismiss the fixed rate out of hand.
Another comparison this time with a longer fixed rate:
• Three discounted rate charging 4.59%. Total interest £99,750.
• 10 year fixed rate at 5.34%. Total interest £97,589. Saving £2,161.
Specifically for BTL clients:
• Two year discounted rate charging 4.24%. Total interest £108,282.
• Seven year fixed rate at 5.69%. Total interest £100,580. Saving £7,702.
As more lenders enter the long term fixed rate market it will only be a matter of time and you will be able to enjoy the stability that this kind of fixed term brings as well as the benefits to your budgeting whilst still being able to obtain a reasonable yield on your investment.
