Gerry Fitzgerald has built a multi-million pound property portfolio which he manages himself. As a former Independent Financial Adviser he is further qualified to offer insight and guidance on the buy-to-let mortgage market. With long experience, both of using letting agents and of managing properties himself, he can speak with authority on the benefits and pitfalls of both approaches. He also runs a successful holiday letting business.
The principal products on offer in the buy-to-let (BTL) market are the following:
- base-rate tracker
A discounted rate (i.e. a discount on the current variable rate) will normally be offered for a period of two or three years, after which the rate reverts to the variable. During the discount period the pay rate can move up or down in line with the lender’s variable rate. It is not fixed. There will be a penalty for redeeming all or part of this mortgage during the discount period.
A fixed rate is just that – fixed, immovable. Fixed-rate terms are generally from one to five years, with the longer fixed rates the most expensive. There is a penalty for redeeming all or part of the loan during the fixed period. There may also be a non-refundable fee for booking the fixed rate at the outset.
Base-rate trackers (BRTs) are linked to the Bank of England base rate (usually 0.5–1% above) and will follow that rate up and down. They can apply for the full term of the mortgage or for a limited period. A BRT will generally be cheaper than the variable rate. Many BRTs have no redemption penalty at all. Those with a limited BRT term will usually charge a fee for redemption.
The lender’s variable rate is the standard rate available on all its products. It can be varied at any time and will be more expensive than the other products offered. There are no redemption penalties.
The choice of product will depend on your circumstances but the following points are worth noting:
- If it is important to be able to redeem the mortgage in the early years, then the variable rate or a BRT (without a redemption penalty) are the only suitable products. The others will tie you in for a number of years with severe penalties (as high as 5%) for early redemption. This is particularly important if you think it likely that you will remortgage with another lender during the period to which the redemption penalty applies.
- You may be quite happy to stay with a lender for the duration of any special deal on offer. It is unlikely, however, that you will want to be tied to the same lender for a number of years after your deal has come to an end (and you are back on the lender’s more expensive variable rate). That is an extended tie-in. It is surprising how often this detail is missed when a tantalisingly cheap interest rate is on offer. Extended tie-ins should be avoided at all costs. There are no free lunches!