The Base Rate and Buy To Let Mortgages

The current Bank of England base rate is at a historical low of just 0.5%, but the International Monetary Fund (IMF) has suggested that further cuts to the base rate may be needed in order to boost the UK economy.

Whilst some consumers with a tracker rate mortgage would benefit from a cut in interest rates, it is likely that some may find themselves no better off financially, as their rate may be collared.  A collar is a restriction on how low the interest rate on a mortgage can go.  If there is a collar, it will be within the terms and conditions of the mortgage.  If no such collar exists, then the consumer will benefit from any cut in base rate.

It is unlikely that lenders will reduce their standard variable rates (SVR) to reflect any cut.  Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “One suspects many lenders would simply absorb the benefit of any rate cut, using it to improve their margins, rather than pass it on to borrowers.”  He points out that while rates have remained unchanged, several lenders including Halifax, Clydesdale and Yorkshire banks have actually increased their SVRs in the past few weeks.

David Hollingworth of mortgage brokers London & Country and Mark Harris both doubt that a reduction in the base rate would lead to an array of new best-buy mortgages. Hollingworth says lenders will be looking at how much it costs to fund their loans rather than the base rate, and this will determine how much they charge.

It seems likely that the low 0.5% rate will continue for some time, and perhaps even be reduced further.  However, the cost of borrowing funds in the market is expected to rise.  Landlords with a buy to let mortgage linked to LIBOR might want to consider switching either to a long term fixed rate, or a tracker rate that is link to base rate, checking the T’s & C’s for any reference to a collar, of course.

If you are considering purchasing an investment property with a buy to let mortgage, or refinancing an existing investment, it is always recommended that you speak to a professional buy to let mortgage specialist who will be able to advise you on the best product for your requirements.