What’s driving landlords to fix rates?

At the moment, there is very little difference in pricing between fixed and variable rates, so why wouldn’t you choose to fix? Fixed rates offer certainty. They allow landlords to plan more accurately and manage their cash flow over a specified period of time.

They also provide protection against interest rate rises. Any landlord who has a fixed rate mortgage now which is still subject to early repayment charges, can be rest assured that their monthly payments won’t be moving despite the fact that the base rate has been increased to 0.75%.

The situation is less favourable for landlords on variable rates, particularly those which track Bank Rate. These borrowers will find that their monthly mortgage payments have increased. Landlords with a mortgage of £150,000 can expect their payments to have gone up by about £31 per month. Brokers will know that the knock-on effect for portfolio landlords with lots of these products could be considerable. No doubt they are having to reforecast cash flows downwards and dig more deeply into their pockets.

The other reason landlords prefer fixed rates – and by that I mean five-year fixed rates in particular – has to do with leverage. After George Osborne announced income tax changes for landlords borrowing personally, lenders responded by increasing their Interest Cover Ratios from 125% to c.145%.

Then the PRA issued guidance to lenders which required them to apply a more stringent stress test to products of less than five years based on a rate of 5.5% rather than the product pay rate or the generally used rate of 5%.

As pay rates are generally lower than 5.5%, personal borrowers are able to borrow more on a five year fixed rate. Of course, pay rates might not always be lower than 5.5% but while they are you can expect the regulator to be keeping an eye on the situation, and even extend the new stress testing rules to include five year fixed rates should it decide that they are being used to side-step the rules.

It’s worth also thinking about the longer term picture. Currently five-year fixed rates are incredibly competitive. If you took one today and then over the next five years, interest rates continued to rise, as did rents (which is highly likely), at some point during the five years you would be in a stronger cash flow position than when you started. Perhaps crucially, you would be in a stronger cash flow position than if you were on a variable rate.