Why economic double-whammy makes remortgaging more pertinent for landlords

Andrew Turner, chief executive at leading buy to let brokerage Commercial Trust Limited, makes the case for why landlords should seriously consider remortgaging as soon as possible, as the effects of an economic double-whammy take effect over the coming weeks.

In the wake of February’s Monetary Policy Committee meeting, the Bank of England base rate held at 0.5% but with a clear warning that it was likely to rise sooner than previously anticipated to mitigate the effects of inflation, continued Brexit uncertainty and a strong growing economy.

That has put many buy to let landlords and mortgage brokers on high alert, as a base rate rise typically precedes an increase in mortgage interest rates – and consequently the amount of money some landlords have to pay each month.

So the message in early February was already loud and clear to landlords: the era of record low interest rates may be coming to an end and if you are thinking of remortgaging, you should speak to a broker sooner rather than later.

Base rate is not the only influence

However, whilst May has been mooted in many corners as the likely starting point for a Bank of England base rate increase during 2018, there is another factor that comes into effect sooner and may see mortgage lenders put up interest rates before then.

In August 2016, in the aftermath of the UK’s vote to leave the European Union, the Bank of England announced a 0.25% base rate cut. At the same time, it also introduced a new, temporary, lending system for banks and building societies to borrow vast sums of money at a preferential rate, ensuring that they could continue to lend to mortgage borrowers at profitable rates.

The financial institutions were quick to take advantage of this system, called the ‘Term Funding Scheme’ – with £106 billion lent, at the time of writing.

According to data from The Guardian, Lloyds borrowed £18 billion, RBS £14 billion, Barclays £10 billion, Nationwide £9.5 billion and Santander £8 billion, whilst many other banks and building societies took smaller amounts running into billions.

However, on February 28th, 2018, the Term Funding Scheme comes to an end, meaning future mortgage funding will have to come from other sources.

And that may be the crux of the problem.

Many banks and building societies may need to look at encouraging beleaguered savers to invest in attractive products, to help provide future funding for mortgage lending.

Savers for several years have been the big losers with record low interest rates, receiving low returns on their investments in bonds and bank accounts.

The banks and building societies will have several years to pay back the money that the Bank of England has lent to them and annual turnover for many serves to reassure that we are not heading for a further financial crisis.

However, in order to run sustainable books, we are likely to see increasing competition to lure savers’ money and help provide the financial resources to fund mortgage lending. This may require a rise in rates to make investment in bank and building society savings accounts considerably more attractive.

The downside of that for many private landlords will mean a rise in mortgage interest rates.

February 28th is a clear watershed mark, but the timing of subsequent lender adjustments is an inexact science.

However, landlords should be very wary of the twin threat to interest rates which could prove one of the big buy to let stories of 2018.

Already we are seeing landlords across the country, but particularly in London, looking to remortgage, as two-year mortgage deals, taken out ahead of the April 2016 introduction of the 3% stamp duty levy on second homes, come to an end.

When the Bank of England increased the base rate in November 2017, some lenders were quick to hike interest rates on buy to let mortgages, with landlords on tracker and variable rate mortgages feeling the effects in their monthly repayments.

Lending environment has changed, call for clarity

The coming months could bring considerable change to the buy to let mortgage landscape and I would urge any landlord looking to act, to do so sooner rather than later.

There have been a number of changes to the lending environment since pre-April 2016 and obtaining the financing to remortgage is less straight forward for many landlords now.

A simple phone call to a large buy to let mortgage broker can help to identify your best options, based on your personal circumstances.

Many lenders (those under Prudential Regulation Authority (PRA)) rules, have tightened their lending criteria, with rental affordability calculations that make it harder for many landlords to obtain the financing they require.

Similarly, PRA-regulated lenders commonly look at the full picture of a portfolio, where a landlord owns more than 3 properties, to demonstrate that they can afford any new borrowing.

However, not all lenders are PRA-regulated. There may also be alternative ways of obtaining the financing you need, such as top-slicing or second charge mortgage loans.

The larger, specialist buy to let broker firms work with a wide network of lenders and can offer a broader range of options to landlords.

Discussing your options as a landlord, would seem a savvy choice to make. One phone call could alleviate a lot of uncertainty.