Figures from the end of 2014 have shown that, despite constant talk throughout the year of imminently rising interest rates, landlords are largely favouring short-term fixed buy-to-let rates over longer-term products.

Between the first and fourth quarters of the year, the percentage of buy-to-let borrowers on two-year fixed rates nearly doubled, whilst the percentage on three-year and longer rates fell [1].

Nevertheless, there is a far greater proliferation of three- and five-year rates on the market than this time last year, and one lender has even launched what it claims is the only 10-year fixed buy-to-let rate on the market. In the broader mortgage market, the number of 10-year rates has more than tripled in just three months [2].
Mortgage lenders generally know how to court commerce. Competition for buy-to-let business over the past 12 months has improved the market immeasurably, with products now cheaper and more flexible than at any time in recent memory. However, the unveiling of these longer-term rates to a seemingly ambivalent market suggests one of two things: either buy-to-let borrowers aren’t fully aware of the options available to them, or they have a greater appetite for risk than lenders seem to think they do.

Fixed rate pricing is broadly in line with swap rates (the interest rates levied on interbank borrowing), which in turn respond to gilt yields (the yields on government bonds), which in turn respond to inflation. Low swap rates means that lenders can both borrow and lend more cheaply. Low inflation in the last quarter of 2014 meant that swap rates fell, resulting in more competitively priced fixed rate mortgages.

Mortgage Application FormLonger-term swap rates also reflect where markets think the Bank of England base rate (BBR) is headed. Last summer, a strengthening economy prompted predictions of an earlier-than-forecast rise, and two members of the Monetary Policy Committee broke ranks, voting for an increase of 0.25% (the first such vote in over three years) [3].

This deviation lasted just five months, before reports of record-equalling low inflation in December prompted the two hawkish members to fall back in line. In this week’s vote, the MPC was again unanimous in its decision to hold the base rate at 0.5% [4].

These mixed signals no doubt fuel the appetite for risk that buy-to-let borrowers seem to have. Why fix for five year or more, they might ask, when rates look likely to fall further?

It is imperative, however, to bear in mind how quickly the market can change its mind. Last June, the Bank of England’s governor hinted that rates could rise as early as autumn 2014, prompting a sharp rise in the pound and a knee-jerk reaction from the markets [5]. Lenders responded by marking up or withdrawing their cheapest fixed-rate deals in droves [6].

When it comes to deciding whether to fix your mortgage rate, there is no right or wrong answer. But all borrowers and investors should strongly consider their attitude to risk and ability to service higher repayments when making this crucial decision.

Written by Ben Gosling for Commercial Trust Limited

References

[1] Walker, P. “Buy-to-let borrowers backing shorter-term fixes”. FT Adviser. 9 Jan 2015

[2] Waycot, S. “10-year mortgage deals fly in”. Moneyfacts. 9 Jan 2015

[3] “Voting on Interest Rates by the Monetary Policy Committee – 1997 to present” [XLS]. Retrieved on 21 Jan 2015 from http://www.bankofengland.co.uk/

[4] Berry, M. “MPC unanimously backs holding base rate amid inflation concerns”. Fundweb. 21 Jan 2015

[5] Farrell, S. “Interest rate warning sends pound surging”. The Guardian. 13 Jun 2014

[6] Coles, S. “Cheap mortgages soon a thing of the past”. AOL. 17 Jun 2014

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