When the Bank of England increased the interest rate to 0.5% in late 2017, buy-to-let landlords throughout the UK felt the pressure of how that might impact upon the profit that they are currently generating from their investments. With the first in approximately 10 years, the rate was increased by 0.25%, and more increases are anticipated over the next couple of years, with an eye on the current state of inflation.
Buy-to-let landlords that hold mortgages have long been the ones benefiting the most from lower interest rates, especially when interest rates initially fell 10 years ago following the financial crisis. As landlords are currently looking at taking a hit to the profit levels that they are now achieving, we look at how investors can combat the increases to the interest rate.
Look into your current mortgage deal
Firstly, you should look at your current mortgage deal to see how long left you have remaining on the deal, as well as what rate your mortgage is currently at. By doing this, you will be able to determine how your mortgage compares to other deals that are available, as there may be cheaper alternatives available to you. If you have come to the end of deal you initially agreed, you will be able to switch products for a cheaper alternative, however if you have not yet reached the end of your agreement, you may not yet be able to switch for free.
If you have indeed reached the end of your agreement, and have fallen onto the provider’s standard variable rate, then you may already be paying a higher amount than you need to be. Therefore, you could research for cheaper mortgage rates, and switch products in order to help you save money each month.
Although it may make sense for you to choose the cheapest mortgage rate simply because it is the cheapest option, this isn’t always the best thing to do. The cheapest mortgage rates are often associated with the largest mortgage fee, as the banks look to make money as part of the deal.
Despite this, bigger mortgage amounts will see less of an impact of the fee on the amount that is being borrowed. As well as this, a longer term initial mortgage deal will see the landlord pay fewer fees, and thus saving money over a prolonged period of time.
Plan for future mortgage arrangements
If you decide to remortgage your property, you should already be thinking about what you would want to do next in terms of your next deal. You should decide between a fixed rate or tracker mortgage firstly, considering that a fixed rate deal is often more expensive, but does protect you from potential interest rate increases in the future.
You should then also look at whether you want to opt for a repayment or interest only mortgage. Interest only mortgages have been the most popular type in recent years, allowing landlords to offset monthly mortgage payments against tax. Although this has been the case previously, the Government has recently begun to reduce the amount of available tax relief, and so this should certainly be something that you take into consideration.
Mark Burns is the managing director of property investment firm, Hopwood House.