Nationwide Building Society’s buy-to-let business is tempting landlords looking for long-term security with ten-year fixed rate mortgages.
Landlords may have felt under the cosh over the past two years but for new entrants and those looking to remortgage rates have barely ever been cheaper.
And as interest rates look likely to rise in the not so distant future, locking into a longer term might seem like a safe bet – but property investors should realise that they are giving up flexibility for that security.
As interest rates look likely to rise in future, locking into a longer term can seem like a safe bet
Five-year fixed rate mortgages are historically cheap, but a few lenders even offer up 10-year fixed rate deals for landlords looking for the longest period of security.
The newest contenders in this space are a pair of 10-year fixed-rate buy-to-let deals from Nationwide’s landlord arm The Mortgage Works.
For those looking for a decade of payment security, the new 10-year fixed-rate range starts at 2.74 per cent at up to 65 per cent loan-to-value, with a £1,995 fee, free standard valuation and £250 cashback. But that mortgage has early redemption charges applicable for the full 10 years.
In addition, the group has launched a new 10-year fixed-rate deal, which doesn’t come with early repayment charges after the initial five years. It costs more though with a rate of 3.24 per cent, at up to 65 per cent loan-to-value, with a £1,995 fee, free standard valuation and £250 cashback.
Paul Wootton, managing director of The Mortgage Works, said: ‘The new 10-year fixed-rate products offer competitive rates and a choice of early redemption charges to widen choice and increase flexibility for landlords, who are looking to manage their cashflow while maintaining long term payment security.’
So how do they compare to the other deals out there?
Coventry Building Society’s Godiva mortgages has two 10-year buy-to-let deals, one at 50 per cent loan to value at 2.85 per cent and one at 65 per cent value at 2.95 per cent.
Both deals come with a fee of £1,900. The pair allow 10 per cent overpayments each year and carry an early repayment charge of 5 per cent reducing to 1 per cent until 2029.
Investec Private Bank also offers a 10-year buy-to-let fixed-rate mortgage, fixed at a rate of 3.69 per cent for lending up to a 70 per cent loan-to-value.
The deal features the option for borrowers to overpay up to 10 per cent per annum without an early repayment charge.
For early repayments over 10 per cent, there is an eight per cent fee for the first three years, reducing on the fourth year by 1 per cent annually, until it hits 1 per cent at year 10.
Is a 10-year fix a good idea?
The average five-year fixed rate mortgage has fallen from 3.77 per cent two years ago to 3.40 per cent in October this year, according to Moneyfacts.
Both Godiva and TMW’s 10-year deals beat these rates by quite a margin.
Traditionally, the only reasons not to lock into a longer deal are cheaper available shorter rates, big early repayment charges, and the possible lack of portability.
With a 10-year fix, you will not have to worry about remortgaging and paying extra fees for a decade.
Landlords would typically have to pay to get out of the loan if they decide to sell up, however.
If you took TMW’s second option, you wouldn’t have to pay early repayment charges after five years, making it no less of a commitment than a five-year fix, at a rate 0.53 cheaper than the average five-year fix.
Plus, the mortgage is portable, meaning you can transfer it to another property if you need to.
Some of the stricter lending rules brought in last year don’t apply to deals over five years long
Crucially for landlords, you can borrow more on a long-term mortgage.
New rules brought in by the Bank of England last year now force lenders to require more rental income cover than they did previously.
You’re locked in, but there is an escape
David Hollingworth of mortgage broker L&C Mortgages said: ’10-year fixed rates remain something of a niche product in the owner occupier market but there’s even less availability for landlords seeking long term security.
‘One of the reasons that many are put off a long term fixed rate is the need to lock into the deal for the full 10 years.
‘TMW has brought an approach that’s been seen in the mainstream residential market to bear in the buy-to-let market by only applying an early repayment charge for the first five years.
‘That gives the option of sticking with the fix but without incurring a penalty if there is a need to review the rate before the 10 years is up.
‘However there is a premium of 0.50 per cent on the rate so it’s a feature that does carry a cost.’
The vast majority of buy-to-let mortgages are now only approved if the landlord can demonstrate their rental income would cover their mortgage payment by a ratio of 145 per cent, if their mortgage rate went up to 5.5 per cent.
This is a significant jump from the previous norm applied by lenders, of 125 per cent rental coverage at a lower rate.
But, the Bank of England’s stricter rental income rules only apply to mortgage deals that are fixed for less than five years, meaning the more onerous income requirements aren’t always applicable to 10-year fixes.
The Mortgage Works’ new deals will be stressed at 4 per cent, or pay rate plus 0.75 per cent, whichever is higher.
The interest cover ratio is 145 per cent for higher rate taxpayers, and 125 per cent for lower tax rate payers, who are unaffected by the new tax regime.
A Nationwide spokesman said: ‘Because the landlord will have payment certainty for a much longer period under a 10-year fix compared to other products, we’re therefore able to offer a different stress rate vs shorter term fixed rates.’
For landlords looking to take advantage of today’s low interest rates for the next 10 years, and maybe even looking to borrow a bit more than they could on a shorter fix, TNW’s new deal could be a pretty good option.
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