Commentary on the Bank of England’s latest interest rate rise from 1.25% to 1.75% on 3 August was somewhat apocalyptic: the biggest rise for 27 years and mortgage rates have tripled in the past year. Yes, it’s unusual for the Bank of England to raise rates by 0.5%, but it’s not that much more than the more familiar increment of 0.25%. And whilst the best mortgage rates – 5-year residential fixes for example - have gone from 1.32% (Nationwide then) to 3.09% (First Direct now), the increase is from a historically low starting point. Plus, a tripling of mortgage rates doesn’t mean a tripling of the monthly payment – so all a little misleading.
There is no doubt that the increase in mortgage rates after a decade of very low rates is a shock to the system both for consumers and landlords. Up until last week, the base rate had risen 1.15% from 0.1% to 1.25% yet Buy to Let 2-year fixes had typically risen by nearly 2%. Lenders were reluctant to offer the cheapest rates and seem to be more cautious about lending.
Markets are expecting rates to peak at 2.8% by the middle of 2023 so there is still a way to go. Capital Economics expects rates to peak at 3.5%. This means that the next 18 months will not be a great time to re-mortgage or product switch. 1.3 million accounts will come out of a fix this year and 1.8 next year and will face the prospect of switching to an expensive 2- or 5-year fix. My instinct would be to switch to a tracker, which is initially cheaper than a fix. The tracker rate will usually initially be cheaper than a fix but will rise or fall with the Bank of England base rate. Often trackers do not have early repayment charges so the customer can come out of it once fixes start to get cheaper, hopefully in 2024.
What to do with financing is one of the top dilemmas for portfolio landlords at the moment. Luckily three of my products were due for a switch earlier this year and I was able to bag the last of the cheap 5-year fixes below 2%. Even so, this went very much against my instinct as I’ve had a decade of fixing for 2 years in the expectation that rates were not going to rise soon. 5-year fixes only looked good for the first few months of this year, in my view, and fixing for 5 years now risks missing out on falling rates in 2024.