Landlords should opt for fixed rates.
Posted on August 17th 2009
BTL landlords currently sitting on lenders revert rates of circa 3-3.5% might feel like rates are pretty good at the moment but the savvy amongst them will be busy after the summer break looking for longer term fixes. The current BBR level of 0.5% only has one way to go in the short to medium term and that is up.
Gross rental yields historically do not follow interest rates so there is a pending headache for landlords who are on variable rates that needs addressing before interest rates start to rise. If you assume quantitative easing is likely to create inflationary pressure it is not too big a leap to see BBR heading back towards 4-5% over the next 2-3 years. Once we have the first move upwards in BBR you can bet your bottom dollar that Swaps will go through the roof and fixed rate mortgages will become so expensive that the rental yields will not justify the mortgage payments.
Right now Swaps are pretty cheap, although significantly more than BBR or 3 month Libor, landlords should seriously think about locking into a medium term fix at anything below gross rental yield in order to eliminate interest rate risk. In my opinion the window of opportunity is going to be relatively short, probably less than 12 months. Landlords face an uphill struggle as the number of BTL products available is at an all time low and it takes a lot longer to get a mortgage through the process than it did a couple of years ago so the time to start looking for a fixed rate mortgage is now.
