Buy To Let Financing
In order to be able to provide buy-to-let financing in the form of a mortgage, most lenders use Ihe money markets to fund themselves. The cost of the money
they purchase (essentially the interest rate that the lender pays for the money they are borrowing in order to lend it on to the mortgagee) changes hour-by-hour
and day-by-day as traders follow all the market trends; i.e. these interest rates are not 'set' by anyone. The biggest influence on the cost of this borrowing is
whether the market anticipates a fall or rise in the Bank of England base rates over the borrowing period.
The money markets enable the mortgage lenders to offer fixed rate mortgages without exposing themselves to the risk of base rates fluctuating over the loan
period, because the lenders use swap rates to hedge themselves, allowing both the lender and the mortgage borrower to lock in' to an interest rate for a given
period. For their mortgage business, the lenders are not speculating against future interest rate movements. They are protecting themselves against such
movements. Naturally, in order to make a profit, the lenders then add a small margin.
The fact that fixed rates have fallen over recent weeks reflects the fact that money markets have anticipated the latest cut in bank base rates. Variable rate
mortgages paradoxically take much longer to react to change in interest rate expectations because they only tend to move significantly when base rates are
changed by the Bank of England. Discounted variable rate products, standard variable rates and trackers are much more influenced by competitive pressures
among the lenders.
So how do you protect your portfolio from these fluctuations? It rather depends on what you believe. If you see rates falling to record levels as the Monetary Pdicy
Committee tries desperately to invigorate a stagnant economy, then you may wish to stick to a tracker. If you think that this is also going to happen over the long term, you may wish to look at a lifetime tracker.
Alternatively, if you prefer not to gamble with your mortgage financing, you may wish to look at a fixed rate mortgage. Fixed rates are currently highly competitive and the providers are cutting their margins to the bone in order to attract customers, so now is certainty not a bad time to fix.
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