Don’t underestimate the value of trackers in today’s market

Originally published by Best Advice

Rate levels, as you might expect, continue to dominate market debate, particularly in the buy-to-let space, which has seen a large number of lenders cutting rates in recent weeks.

There is nothing negative to be said about such a situation, and let’s certainly hope that the downward trend we have witnessed continues onto the end of 2023 and beyond.

We’re all acutely aware of what ‘damage’ a high rate environment can do, not just in terms of what it means for landlord borrowers looking to refinance, but also in terms of any decisions they might be making to add to portfolios.

Higher rates means a higher affordability bar to get over and when those rates do come down, it eases that pressure and it tends to provide greater opportunity to look at remortgaging, rather than merely rely on a PT, or it can help get the maths in order for those wanting to buy.

For many landlords, what they want are options at the point of finance, but also there will be an increasing number who want options in the near term, especially if they believe that rates – both swap and Bank Base Rate (BBR) and subsequently, product rates – are likely to keep falling.

Now this requires a large degree of crystal-ball gazing, and for all those who think it’s likely we’ll see a BBR cut in the next few months, there are also those who believe it’s not likely anytime soon, perhaps not in 2024 at all.

However, this question should also be answered in the context of what swap rates do and what lenders are able to offer in terms of product price cuts. Certainly, the greater stability and certainty we’ve seen from the money markets has resulted in falling swap rates, and this has been able to be utilised by those lenders who are funded in this manner.

But, back to those landlord product options. Fixed-rates have tended to be the ‘go to’ option for many landlord borrowers recently, simply because a five-year fix tends to offer the better rate plus the better opportunity to meet affordability and secure the loan amount required.

However, if there is an anticipation that rates will continue to inch downwards, then fixing in for a longer period of time might appear to be an expensive option. Even more so, if the borrower has plans to be active with the property during that time – perhaps a five/seven-year fix is deemed to be too long if your investment horizons are less than this.

Or you might simply weigh up the perceived expense of fixing for the long-term against the opportunity of taking a shorter-term product, or indeed one that you can move away from in double-quick time with no ERC, if those fixed-rates continue to fall.

We’ve certainly seen a greater interest in our Tracker mortgage products in recent weeks, with landlords willing to pay a little bit more over the shorter-term in order to have the flexibility that such a mortgage provides.

Fleet has just dropped the Tracker loading on our standard and limited company products by 50 basis points, meaning our Trackers are now at BBR plus 1.25%, currently 6.5%, and our Green Tracker – for those properties already at EPC level C and above – at BBR plus 1.15%, currently 6.4%.

Clearly, there is a cost to this in terms of monthly mortgage payments, but as mentioned if the landlord does believe we will continue to move into calmer rate waters, then as long as they can meet the affordability, they will have the chance to move from ‘tracker to fix’ at a time of their choosing without having to pay any fees to do so.

The fact that many lenders, including Fleet, also offer product transfer options to these landlord borrowers at the end of their existing special deal, means they can have confidence they’ll secure mortgage finance in the future, at potentially far lower levels than they are paying now. If, of course, product rates continue to move down.

Overall, as mentioned, we want advisers and their landlord clients to have product options that give them the flexibility, or stability, they might crave at any one time. For some, fixing right now is a no-brainer, but for others the short-term option of a Tracker can put them in a good place now, but also afford them choice in the very near future, should the market move in that direction.