Landlords beware: the fixed-rate mortgage trap

Landlords beware: the fixed-rate mortgage trap

Landlords have seen regulation eat into their profit margins and many will now be facing an uncertain financial future. Given recent Stamp Duty Land Tax increases, and the upcoming loss of mortgage interest relief, it’s now more important than ever for landlords to effectively manage the costs they can control, and ensure that they have a mortgage in place which best suits their aims and objectives.

Fixed rate mortgages are currently the most popular for two main reasons. Firstly, knowing exactly how much you have to pay each month for a set period of time provides a degree of financial certainty. And secondly, while other types of mortgages are available, they are simply no longer competitive. The variable rate and tracker rate products simply do not stack up, unless you are planning to sell within the next two years. Why select a variable rate on 2.7% when you can secure a fixed rate for 2.75%? Rates are definitely going to increase, it’s just a matter of when and how quickly. For 0.05% the risk does not outweigh the reward.

The issue with opting for a fixed mortgage rate is that if you chose to sell the property within the fixed term you will be subject to early repayment charges (ERCs) from the lender, which can cost thousands. Meaning that the main question for landlords is, if you don’t plan to sell your property in the very near future, how long you should you fix your payments for?

There is no perfect solution or correct answer and it will depend entirely on your personal circumstances and how much the security of a long term fixed rate product means to you, if it’s worth paying the extra cost per month.