Buy to let mortgages - fix or track for maximum savings?

Mortgage rates have plummeted in recent months, as the Bank of England repeatedly cut the base rate in response to the economic crisis. But the past fortnight has seen banks and building societies pushing the cost of fixed-rate mortgages back up, causing problems for investors hoping to take advantage of low property prices.

The vital question facing buy to let investors is now: go with a tracker, or ‘lock in’ the savings with a fixed rate mortgage?

Those with tracker mortgages have had a very good few months. If your bank has passed on the base rate savings (some have not, invoking ‘collars’ that prevent the rate falling too far), you could easily be saving hundreds of pounds every month as a result of cheaper repayments. As analysts tried to predict how low the Bank of England could go with interest rates, many borrowers tried to pick the optimum time to move to a fixed rate mortgage in the hope that they would extend their savings for as long as possible.

It now looks as though the base rate will not fall any further. Many analysts predict that rates will rise by the end of the year, although the general consensus is that the Bank will only increase them by around 0.25%.

But tracker mortgages are currently significantly cheaper, on average, than their fixed rate counterparts. For example, a £150,000 mortgage with a 40% deposit is currently available at around 3.5 per cent with a fixed deal, or below 3 per cent for a tracker*. This price difference is leading many borrowers to opt for tracker mortgages.

Those who are choosing trackers over fixed rate mortgages are risking significant hikes in their monthly repayments in exchange for short term savings. Consider the impact of a 2% increase in the base rate - certainly not inconceivable during the coming year. On a £300,000 mortgage, such an increase would result in a rise in monthly payments of £152.

On the other hand, the cost of fixed rate mortgages is rising rapidly. Banks and building societies across the board are increasing their interest rates, partly as a result of continued efforts to reduce their mortgage liabilities. In little over a week the average cost of a two-year fix has jumped by nearly 0.2%, with five-year fixes rising by a similar margin. As such, time is tight for those hoping to take advantage of low cost fixed rate mortgages.

Fixed rate mortgages have a number of advantages. Primarily, they offer the peace of mind that your repayments will remain the same for the entire term of your deal. This can be particularly important for professional landlords, who need a clear idea of their outgoings in order to budget properly. Furthermore, you will be able to insulate yourself from the effects of potentially significant interest rate hikes - an eventuality for which all buy-to-let landlords should be preparing.

Consider, though, that trackers may still be useful for professional landlords in the current climate. Any increase in base rates is likely to take place gradually, and will probably begin in earnest during the first quarter of 2010 in response to the pressure of inflation that is likely to occur as a result of quantitative easing. However, it is easy to forget that even a year of sustained rate rises during 2010 is unlikely to bring the base rate much above 3%. Compare this to November 2007’s highs of 5.75% and you will see that this is still very low.

As such, if you are confident that you could afford the increased monthly repayments, a tracker might still be a good option. This way you will continue to benefit from low base rates while trackers are cheaper than fixed deals. Furthermore, if you take out a two-year fixed rate mortgage you are likely to find that rates (and therefore monthly repayments) are higher when you come to renew. Many borrowers would suggest that it is better to be eased into this increase than to be suddenly forced to come up with an extra few hundred pounds a month when your mortgage expires.

Finally, it is sometimes possible to ‘reserve’ a rate for a fixed rate mortgage. If you want to fix now but your current mortgage has not yet expired, it is worth talking to lenders about locking into current rates. Many will allow you to reserve the current rate for up to six months - probably a smart move, given the current upward trajectory of fixed rate mortgage costs.