Case study - Variable rate buy to let mortgage

Categories: Case study | buy to let mortgages

Summary of the case

  • Client called in September wanting to remortgage
  • The existing mortgage renewal date was January the following year
  • Budget per month for mortgage payment was £400
  • Mortgage interest rates were rising rapidly

What we achieved for the client

  • Monthly mortgage payments that were £125 less than the client’s budget
  • Fee assisted legal costs
  • Fixed and variable rate options

Remortgaging to a buy to let variable rate

With this case, we began our conversation with our client in September, well ahead of the date they needed to remortgage, which was in the following January. This is a great approach to take to remortgaging, because it gives you plenty of time to lock in a deal if mortgage rates are rising, or simply gives you plenty of time to prepare in other circumstances.

Our initial conversation focussed on looking for a fixed rate deal, but the client actually ended up remortgaging on to a buy to let variable rate.

At times of change in the mortgage market, naturally property investors will be closely monitoring their renewal dates and planning their investment strategy.

When rates are going up, securing a long term fixed rate can be highly beneficial.

The advisor on the case researched the fixed rate market. This particular client had set a target budget for the monthly cost of their mortgage at £400.

Unfortunately, given the rise in mortgage interest rates, whilst the advisor could get close to this amount (£450 per month) there was no fixed rate coming in exactly on target, or below.

We discussed this with the client, who was keen to keep within budget. So, we presented the option of looking at variable buy to let rates.

Achieving a cost saving with a variable buy to let mortgage rate

Researching the exact same scenario for the client but looking at variable buy to let mortgage rates, the advisor was able to secure a deal which would cost the client £275. This was £125 per month less than the budget the client had set and £175 less than the fixed rate deal.

Whilst this immediately offered a cost effective solution to the client, there are considerations to be taken into account.

This particular deal was a discounted rate, which tracks the lender’s standard variable rate. If the lender increases their standard variable rate, during the course of the initial rate period, the client’s monthly cost will go up.

Some variable rate deals come with no early repayment charges, which can mitigate the risk of going for a mortgage whose interest rate could go up during the initial rate period, but this was not available with this product.

However, another way to mitigate some of the risk associated with variable rates, is to take a deal which has a shorter initial rate period. The mortgage we secured for this client had an initial rate period of 3 years, not the 5 years the fixed rate deal came with.

This means that if, in three years, mortgage interest rates have risen to the extent the deal is no longer cost effective, the client can find another deal sooner than if they were on the 5 year deal.

Best and cheapest buy to let mortgage rates

In recent years the industry has seen some of the best buy to let mortgage rates ever available. Not so long ago, the lowest buy to let mortgage rate you could secure was 0.99% per annum.

At a time when the lowest buy to let rate was below 1%, you could be fairly confident that a rate you secured was going to be exceptionally competitive. This is because, even if you weren’t eligible for that deal, others at different loan to values, or with different criteria, were all competing with some of the cheapest buy to let deals around for a long time.

For this reason, long term fixed rate buy to let mortgages became exceptionally popular. This popularity was also fueled by changes in buy to let mortgage underwriting.

Back on 1st January 2017, the Prudential Regulation Authority required lenders they regulated to tighten buy to let mortgage affordability rules. This change was intended to increase financial protection for mortgage borrowers, by helping to ensure they did not overstretch their ability to pay their monthly mortgage costs.

This meant that when some landlords came to remortgage, their rent was not enough to support the borrowing they required (even when they were not increasing the amount they borrowed) over a two year initial rate period.

5 year fixed rates remained more flexible on affordability, because where a rate was fixed for five years, it was perceived that there a degree of protection to the borrower that their monthly costs would not go up without warning.

This is another reason 5 year fixed rate buy to let mortgages gained in popularity over variable rates.

Buy to let mortgage rates in 2022 and 2023

February 2022 – June 2022 saw gradual increases of 0.25 basis point increments, to the Bank of England Base Rate. The Base Rate is a strong influence on mortgage interest rates.

This was being done to try and bring inflation under control.

However, inflation was moving at such a pace, the Bank of England chose to increase the Base Rate by 0.50 basis points in August 2022 and by the same amount again in September 2022.

These two significant increases only a month apart had a huge impact on the mortgage market. Some lenders were forced to withdraw all of their products, temporarily, to re-calculate the deals they could offer clients.

Fixed buy to let mortgage rates had been rising, but then jumped from around 2-3% to 5% and more, depending on the requirements of the borrowing in question.

As a result, where fixed rates had dominated the buy to let mortgage market, variable rates began to offer much more competitive initial rates.

Fixed rate versus variable rate buy to let mortgages

A fixed rate means certainty of mortgage costs each month, whereas variable rate costs can change.

If mortgage interest rates go up, being on a fixed rate protects you from more expensive monthly costs. But, if interest rates go down, you could find yourself paying more than you might have on a variable rate deal.

With a variable rate deal (which include managed variable rates, discounted variable rates and tracker rates, all of which are types of variable rate) you could benefit from lower monthly mortgage costs, if interest rates go down. But, if interest rates go up your mortgage costs would go up too.

Both fixed and variable rate buy to let mortgage deals have at times come with no early repayment charges, which can reduce the risk of taking either type of mortgage and then seeing change in the marketplace which puts you at a financial disadvantage.

These deals may come with slightly higher rates, to account for the fact that you may exit early, but they may still offer a competitive option with added flexibility.

Buy to let mortgage comparison

To understand the difference between fixed and variable rates, use our calculator to compare buy to let mortgages.

Once you have input your property details and submitted them you will get a page of results, you can use the filter menu to see just rates by type.

You can also use the filters to see deals with no early repayment costs.

To understand which deals you are eligible for, contact our advisors and they can establish what exactly you need and which deal offers you a suitable solution.