Better Off Opting Out of a Fixed Rate Mortgage For Investment Properties?

We’ve recently covered the especially attractive rates landlords with investment properties are being offered on fixed rate mortgages. Despite the Bank of England raising the base interest by 0.25% twice since this time last year, competition for business has seen the fixed 5 and 2 year terms on offer by lenders actually improve. The result has been a flood of investment properties taking advantage by their owners negotiating improved mortgage terms.

However, while there are planning advantages for landlords who lock in a fixed rate, there is also a possibility that their best approach to reducing monthly mortgage repayments could be to take the contrarian decision to go for a variable rate mortgage instead. With the Bank of England rate still at 0.75%, a recent study by the Yorkshire building society finds that interest rates will need to rise by another 1% before the best fixed rate deals currently on offer become more attractive than the variable rate alternative.

With the UK economy likely to undergo a period of uncertainty whichever way the ongoing Brexit negotiations finally go, there is a strong argument that the Bank of England is unlikely to presented with conditions that would make it confident enough to quickly raise rates anytime soon. That presents the argument to landlords that they might be better off going for a variable rate now and taking a risk on possibly losing out on currently attractive fixed rates. However, even if a new fixed rate mortgage were to be secured for an investment property two or three years from now at a slightly poorer rate, two or three years of lower payments would already have been banked.

The Yorkshire study compares mortgage interest payments on its best variable deal, a two-year discounted 1.17%, with how they might rise with interest rates. Right now, monthly payments on a £150,000 mortgage would be £576.93. A rise in the Bank of England’s interest rate to 1%, by 0.25%, would increase this to £594.28. But the variable rate would need to reach 2.17%, on the basis of a BoE base rate of 1.75%, before payments rose above those of the best fixed rate deal on offer, which is a 2.16%.

Another advantage of variable rate tracker mortgages is that they usually allow holders to switch onto a fixed rate product at a later date without having to pay an early repayment charge. So, for owners of investment properties who are not convinced that interest rates will rise by a whole 1% over the next couple of years, perhaps variable options are still worth considering.