FISCUS MORTGAGES - INFORMATION AND ADVICE

Different Types of Buy-to-Let Mortgages

There are many different types of mortgage to consider. The following are those we recommend for buy-to-let, however, for more in-depth information on these and other mortgages, see our Mortgage Types section. We also suggest you take a look at our buy-to-let mortgage tables, which allows you to compare the most competitive rates currently available in the UK.

FLEXIBLE MORTGAGES

In an ever changing business environment, flexibility is crucial. The business of a residential property investor is no different. An investor might have an idea of when he wants to sell but can rarely predict when he will need or otherwise be tempted to sell. For this reason an investor should seriously consider the implications of redemption penalties.

With a flexible mortgage many lenders will allow an investor to make overpayments. This facility can be used to plan the early repayment of a mortgage. Where the level of flexibility extends to re-drawing overpayments, an investor can utilise the facility as a "sinking fund", say for refurbishment or so that payments can be missed in the event of rental income not being generated for a period.

BASE RATE TRACKERS

This is where a lender bases interest rates at a margin over the Bank of England's minimum lending base rate (otherwise known as the Bank’s “repo” rate). Many lenders prefer not to offer mortgages on this basis, as they are then tied to a fixed level of profitability. However, from a borrower’s perspective, they are the best variable rate mortgages available. As a caveat though, be cautious of lenders who are offering low rates, ensuring that the basis of calculating interest rates in the future is known.

L.I.B.O.R.

Some lenders are unable to lend against bank base rate for technical reasons. The alternative is LIBOR which stands for “London Inter Bank Offered Rate”. In simple terms, most lenders will fix their LIBOR rate every three months. LIBOR is typically within 0.25% either side of the Bank of England minimum lending rate. When measured over any reasonable period of time LIBOR and Bank of England base rates are similar but if anything LIBOR is marginally higher.

CAPPED RATES

By capping your interest rate you are effectively putting a ceiling on your interest rate, within a specified term, but without fixing. The main advantage of a capped rate mortgage is that your interest rate can fall but not rise above the capped rate. The disadvantage is that capped rates are often slightly higher than fixed rates.

FIXED RATES

The main advantage of fixing your interest rate is certainty of knowing what your repayments will be for a certain amount of time. Depending upon economic conditions you may also be able to secure funding at fixed rates which are below variable rate pricing. The downsides are loss of flexibility, increased redemption penalties and/or extended redemption periods.