Variable Rate Mortgages


Neil Simpson is a former Personal Finance Journalist of the Year and the author of the Buy-to-Let Investor column in Financial Mail on Sunday. He is a keen property investor and writes about buy-to-let online as well as for a variety of publications including City AM.

This looks set to be another bad week for anyone with a variable rate mortgage. The Bank of England is due to announce its latest interest rate decision at noon on Thursday 5th July – and almost everyone is expecting another 0.25 per cent rise. That will be the fifth in a year and take base rate to 5.75 per cent. If your deal is linked to your lender’s variable rate then it will probably go up from August 1st, though people with more modern tracker deals that follow base rate will go up sooner.

Fixed rate borrowers are fine – unless of course their existing deals are ending. Up to two million people took out two year deals in the second half of 2005 and a fair percentage of these will be buy-to-let borrowers. All are in for a shock. Even if you can switch straight on to a new best buy fix your monthly interest payments will rise by around £11 for every £10,000 you have borrowed. If you can’t arrange the switch in time – probably because you don’t shop around and get in an application soon enough – then the pain will be even worse. You will be on your lender’s variable rate until you get your act together. And that’s likely to be around 8 per cent.

Best advice? Check exactly when your current deals end, whether they are fixes, discounts or trackers. Then get in touch with a decent independent broker. Get them to find you the best rate to jump on to and tell them exactly when you want the transfer to take place. In the past you could normally rely on everything getting done in time if you started the process six weeks before old deals expired. But brokers tell me there seem to a be a lot more delays in the system this year (probably because of the two million other re-mortgage customers all chasing the same rates). So if it was me I’d call my broker two months before my current deals end.

A quick look at the best-buys with Landlord Mortgages shows that even if rates do go up again on Thursday there are still some keen deals to be had. You just need to make sure you have a good spot in the queue to get them.

Abbey has just come out with one of the most interesting predictions of the summer. It reckons that now England has followed the rest of the UK and banned smoking in public the number of house fires is going to rise. It’s theory is that if we can’t smoke when we are out we are more likely to do so at home. People who would have held parties at the pub are more likely to do so at home, it thinks. And with one household in three believed to contain a smoker already the risks are high. Abbey’s figures say there are already 425,000 house fires caused by smoking every year. They create an average of £25,000 of damage.

Landlords need to be ready. Even if smoke alarms aren’t a legal requirement of your property type they are pretty much an essential extra. If they are battery operated it’s worth checking them whenever you do an inspection. And remind your tenants they are there for their benefit. It’s also worth noting that the £25,000 cost of a fire doesn’t include the loss of rent or extra accommodation costs which can come a landlord’s way after this kind of crisis. One more reason to consider proper landlord insurance. It’s worth reading up on.

Latest figures from the Council of Mortgage Lenders show we’re all going offset mortgage crazy. Take-up rose by nearly a half last year (not sure why it has taken the people until July to add up the 2006 figures, but there you go). Offsets have always been complicated to understand but fans say they are the most sensible financial arrangements around. Unfortunately I’ve never been convinced that they work that well for buy-to-let investors. The whole point of an offset is that by putting some spare cash in a linked savings account you cut the amount of interest you need to pay and chip away far faster at your outstanding debt. But the tax breaks on property investment mean it pays to have as big an outstanding debt as possible and the less interest you pay on your investment mortgage the more tax you can end up paying.

So don’t automatically follow the crowds towards an offset when you remortgage your rental properties. Pick one for your main residential mortgage instead. You can even pay any rental profits into its linked account and save your tax money there as well. That way your investments still make maximum use of their tax breaks and your main home becomes mortgage-free much faster. Can’t beat that.

Finally, one more bit of surprising news. Nationwide says house prices are picking up again. It reckons they went up 1.1 per cent in June, making it three rises in a row. Today’s prices are an average of 11.1 per cent up on a year ago, apparently. So property owners are making an average of £50 a day. Halifax will be announcing its figures later this week. Word has it they will be a little less positive than Nationwide’s and will be in line with those from Hometrack (up just 0.3 per cent last month with a few dips in key areas).

Overall I think the slower and lower rises are likely to be the most accurate. Some more dips later in the year will also take away some of the gains we have made in the spring. But then no-one ever said 2007 would be an entirely comfortable year. None of us should have signed up to this year’s property market expecting an easy ride.