Buy-to-let mortgage rate rise fears
Almost 7,000 buy-to-let landlords will face a rise in their mortgage rate, after West Bromwich Building Society said its buy-to-let tracker mortgage rate is to rise by 2 percentage points. The move has led to fears among landlords that other banks and building societies will follow suit.
There are around 6,700 landlords on West Brom's buy-to-let tracker mortgage. As tracker mortgages usually track movements in the Bank of England base rate, these customers might have presumed that there was no mortgage rate increase in the offing.
The Bank of England base rate has been at the record low of 0.5% since March 2009 and the Bank of England governor Mark Carney has hinted that it may not rise for another two years.
However, most lenders reserve the right in their terms and conditions to increase the rate should they deem it necessary. West Brom said its increase – due to come into force on 1 December – reflected "market conditions".
While the 6,700 buy-to-let customers on tracker mortgages are all on different mortgage rates – as the product was on sale from 2006 – the rate rise means that some customers will see their mortgage rate effectively double.
A West Brom spokesman said: "The West Bromwich has advised a number of buy-to-let borrowers who have tracker mortgage accounts with the West Bromwich Mortgage Company that their rates of interest will be increasing by 2% from 1 December 2013. All borrowers affected are landlords of multiple property portfolios.
"These changes, which are permitted under the terms and conditions of the accounts, are a reflection of market conditions and the need for us to carry out our business prudently, efficiently and competitively."
The Bank of Ireland made a similar move earlier this year, when it increased the interest rate on buy-to-let tracker mortgages sold from 2003 onwards.
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.