It’s a fact that the Bank of England base rate does not directly affect most mortgage interest rates. This is because the majority of mortgage lenders get their money at commercial money markets and keeping an eye on SWAP rates will give the best indication of whether the cost of borrowing on your next project is going up or down. Never-the-less, with the bank of England making the first rate cut in August since March 2020 did have one important outcome; more confidence returning to the UK property market.
As an investor this is probably bad news because more confidence means more buyers, more buyers more competition, and more competition means higher property prices. That said, savyy investors find opportunities in any market.
We’re also seeing greater competition between mortgage lenders. This competition manifests in the form of interest rate reductions which in turn attract more business for the lender. This is good news for property investors as the cost of borrowing is reduced, making it easier for deals to stack up positively and ultimately increasing profit margins.
Another up shot from reduced interest rates is that 2 year fixed rate deals are just about making sense again. For a long time 2 years deals have been a token gesture, available at the back of the cupboard but not getting used because they just weren’t a commercially viable option for most investors.
There’s a few reasons why this is including that, particularly with single let properties, property investors couldn’t achieve the maximum borrowing of 75% of property value due to the underlying calculation mortgage lenders use, which basically dictates that the higher the interest rate is, the higher the rent needs to be in order to lend the money. The second reason is what I call ‘all in cost’.All in cost is the total cost of the mortgage inclusive of the interest rate and product fee. Is it bang on accurate – no. But it is a handy metric for investors to use to compare mortgages quickly and easily.
Product fees have increased significantly for limited company mortgages in recent years. For example the cheapest limited company BTL rate right now is xx% but this is hiding a xx% product fee. The all in cost gives property investors a quick rule of thumb tool to compare one mortgage against another t determine which is the lowest cost. Using this method enables comparisons against 2 year, 3 year and 5 year fixed rates all at once and it doesn’t matter how much the interest rate or product fee is.
It works like this:
Interest rate x fixed rate period + product fee (divided by fixed rate period)
5.9% rate x 5 years + 5% fee / 5 years = 6.9%pa all in rate
5.8% rate x 3 years + 4% fee / 3 years = 7.13%pa all in rate
6.2% rate x 2 years + 1% fee / 2 years = 6.7%pa all in rate
So in the above example we can see that the 2 year rate is the best option… Or is it? Because the ‘all in rate’ is not the end of the story.
When you take a 2 year deal, you’re going to have to do it all again in 2 years’ time. That means another mortgage product fee, another valuation, and another set of legal costs. Plus time and admin and hassle. With a 5 year deal the product lasts longer and you get more ‘value’ for your money. Plus costs are predictable for longer, giving cashflow security.
So there’s a lot more to it than just looking for the lowest interest rate. Ultimately, it’s important not to make decisions based on interest rates alone but consider the wider circumstances and preferences
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