Landlords’ profits have come under further pressure following the rise in interest rates by the Bank of England to 0.5 per cent.
The bank raised rates by 0.25 per cent, the first time in a decade last week. And more increases could be on their way with the bank’s deputy governor Ben Broadbent saying he anticipates a ‘couple’ more hikes to get inflation - which is currently at 3 per cent - back on track.
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With landlords already facing punitive tax changes and increased regulation, how do landlords maximise their profits in the new interest rate climate?
1. Check your current mortgage rate
The first thing to do is to check the mortgage rate on your buy-to-let mortgage and how far through your initial deal you are.
Take a look at how your current rate compares to deals currently available in the marketplace as you may find cheaper alternatives.
If you have not come to the end of your initial deal, there is a chance you may not be able to switch deals without a financial penalty. However, if you are already at the end of the initial deal, you will be free to switch.
This may be a good option if you have slipped onto your lender’s standard variable rate following the end of your initial deal.
This standard variable rate may be higher than you have been paying and so your monthly mortgage payments may have increased. Researching cheaper mortgage options could help you make some savings on your mortgage payments each month.
2. What are your future mortgage options?
If you’ve decided to remortgage, consider what type of deal you want next, including whether it’s fixed rate or tracker, repayment or interest-only, and with the same mortgage term or longer.
Fixed rate mortgage deals tend to be more expensive than variable rates as they fix your monthly payments, safeguarding you against any future interest rate rises.
There is also the issue of whether to opt for an interest-only mortgage. These have been the most popular type of buy-to-let mortgage as they allow landlords to offset the monthly mortgage payments against tax.
However, the Government’s decision to reduce the amount of tax relief available to landlords during the next four years means this option is less valuable to landlords than it once was.
You will need to consider if you want to have paid the capital off at the end of the mortgage term - and if so, whether a repayment mortgage is more suitable for your situation.
3. Is it worth paying a large mortgage fee?
The cheapest rates tend to come with the largest fees. This is because banks need to make money one way or another on each deal they offer.
However, in general, the bigger the mortgage amount, the less effect the fee has on the total amount you are borrowing.
It is also worth remembering that you’ll pay fewer fees over the full term of a mortgage if you opt for a longer-term on your initial deal.
Remember to seek expert advice before making any financial decisions.