As Interest rate set to increase, put a contingency plan in place.

11 11 2014

It’s highly likely that interest rates will start to rise during the course of the next couple of years. However, I think the increases to Bank of England Base Rate will be small and in gradual increments, perhaps reaching 2.00% by the end of 2016. This of course means that the pricing of Buy to Let (BTL) mortgages is also likely to rise, as lenders retain their profit margins.

When considering the implications of a potential rate rise, there is no need for landlords to panic, but some contingency planning is definitely prudent. It is advisable to consider whether current rental income is sufficient to cover any increase in monthly mortgage payments and to ensure a surplus for potential void periods. Most lenders are conservative with their rent stress tests and will only approve a BTL mortgage where the rental income is at least 125% at a notional interest rate of 5.00% of the loan amount. This should provide a sufficient rental income buffer for most properties.

Fixed rates

For landlords who prefer to know exactly what their monthly payments are going to be, choosing a fixed rate mortgage may be the preferred option. At Belvoir Lettings Mortgages, our most popular BTL products are often two-year fixed rates. However, there has also been an increase in demand for three-year and five-year fixed rates in recent months.

There is certainly a good argument for fixing over a longer period such as five years. Although five-year money is more expensive and the monthly mortgage payment will be higher, it does provide security and peace of mind over the longer period when interest rates start to rise.

Although the Base of England Base Rate is predicted to rise, I believe that three years into the future the “new normal” is likely to be between 3.00% and 4.00% and that rates will remain lower than historical “pre-credit crunch” rates of around 5.00%

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