Landlords trying to secure shorter mortgage fixes while they consider selling up or waiting for costs to fall are finding they cannot afford to do so, experts have said.
Mortgage brokers have told The i Paper that some buy-to-let home loan holders are asking to get two-year deals, as they want to sell their property in the near future, and fixing a deal for longer – typically five years – would make this difficult.
But the way lenders stress test mortgages for potential landlords mean they are being told they have to get out longer deals.
Research from the National Residential Landlords Association (NRLA), published this week, found that equal proportions of landlords would like to get five-year and two-year mortgage deals.
But brokers say most of their clients are ending up getting five-year fixed rates because of affordability challenges with short-term fixes.
A buy-to-let stress test determines if a potential borrower can afford mortgage repayments on their property and these are more lenient for longer-term deals.
Chris Sykes, of brokers Private Finance, said: “I have had some landlords asking, ‘can we do a shorter-term fixed rate in order to sell it at some point’.
“The difficult thing is that I have had a lot – or at least a few – clients who might like a two-year fix, but haven’t been able to get one. That’s generally because the stress rate on five-year deals are much more lenient.
“You get significantly more borrowing on a five-year than a two-year, especially with interest rates higher a lot of people are struggling to get their current level of borrowing on a five-year fix, let alone on a two-year fix.”
Mr Sykes said £1,000 per month of rental income on a five-year mortgage fix may open up borrowing of £150,000, whereas on a two-year fixed deal, this would perhaps only be £110,000.
It’s possible to sell a property part way through a mortgage fix, though there may be extra hurdles such as early repayment charges on the deal.
Darcie Mackenzie of brokerage Clifton Private Finance added: “We’re seeing landlords being tied into this more restrictive market: two-year fixes have become increasingly difficult to obtain as lenders impose tighter affordability rules in this area.
“In light of the increased expenses, a number of landlords have increased rent, but this doesn’t necessarily align with valuers’ expectations, so applications are being rejected and buy to let affordability is being squeezed further.”
Ray Boulger, of John Charcol brokers, said: “Most of our landlord clients are continuing to choose a five-year fix – mainly due to affordability. Unless a landlord has a large amount of equity, many need to take a five-year fix to get the borrowing they require, as many lenders offer a larger loan with fixed rates of at least five years.”
David Hollingworth, of L&C Mortgages, said the proportion of landlords opting for two-year deals with the brokerage had moved from over half of clients to a little below half recently.
“I’m sure some will be due to affordability requirements,” he said.
“We have seen the balance shifting slightly in favour of five-year deals. That may be due to rates improving generally and the outlook becoming a little clearer but will also be motivated by the ability to meet affordability requirements which can be tougher on shorter term rates,” he added.
This is unlikely to have much impact on rents, which have already been pushed higher as a result of increasing interest and mortgage rates.
Mr Hollingworth added: “Landlords are looking to find the right balance in rent and affordability. If they keep pushing rent higher and higher they risk non payment or voids as they price themselves out.
“Affordability will have affected rents but the short and longer term choice is more lenders and landlords looking for more flexibility.”
Chris Norris, campaigns and policy director at the NRLA said: “According to our polling one-third of landlords anticipate that they will take a five-year fixed rate, this is up 8 per cent since the first quarter of the year.
“Whether this increase has been driven by necessity, in that landlords find it easier to satisfy the stress testing requirements, or because during uncertain times landlords may be looking for certainty around their mortgage rates, it’s impossible to say.”
Data from Moneyfacts shows that earlier this year, average two-year and five-year buy-to-let mortgage rates were at similar levels – both reaching 5.48 per cent in early February.
Two-year rates have since dropped lower, reaching 5.34 per cent, while five-year rates have lagged higher at 5.45 per cent.
Many brokers expect rates to fall next year, though this is not guaranteed.
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