BRIAN owns two properties: one is his home in London and the other is a buy-to-let property in Birmingham. He has variable rates on both mortgages (his lender for the London property is Northern Rock, and Birmingham Midshires for the buy-to-let). Both deals carry redemption penalties. He is concerned about interest-rate rises and wants to know if it is worthwhile paying the redemption penalties and switching to a fixed rate. Brian also hopes to move in a year’s time.
Simon Jones, of Savills Private Finance, says: Although interest-rate rises are widely predicted, it isn’t possible to predict exactly how much they will increase. But even if the pay rate on Brian’s discounted Northern Rock mortgage went up by, say, 1 per cent, he would still only be paying 4.99 per cent, which in the current market is competitive. At the end of Brian’s discount period, however, the interest rate will shift to his lender’s standard variable rate (SVR), currently at 6.29 per cent. Brian should ask Northern Rock before the end of the discount if it can switch him on to an attractive fixed rate. It is inevitable he will not be able to get a rate as attractive as the 3.99 per cent he currently enjoys. However, he should be able to get a rate which is lower than the current SVR: for example, Northern Rock offers a two-year fixed rate at 5.19 per cent.
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Brian has redemption penalties of £680 on his buy-to-let property. As this mortgage is on a rather high variable rate, it may be wise paying the penalty and switching to a fixed rate. The Mortgage Works currently has a five-year fixed rate at 5.79 per cent. Lenders take into consideration the rental income achieved on a property when deciding on the amount they will offer. With a monthly rental income of £465, he can remortgage for the £68,000 that he needs.
If Brian does decide to move next year, then he is likely to be able to borrow approximately £150,000 to £170,000, depending on his pay rise and bonus. He will need to ensure that the new lender is comfortable with his existing properties held on a buy-to-let basis and needs to be able to demonstrate rental demand. Savills Private Finance: 0870 900 7762
Peter Barrett, of MyMortgage Direct, says: Brian is right to be nervous about rising repayments: his Northern Rock deal is due to move to a higher standard variable rate, and more rises in base rates are on the cards. That means his monthly payments of £700 could jump to around £840.
Brian wants to know whether it is worth shouldering his redemption penalties now and moving to a fixed deal. This is not likely to give him any real saving on his London mortgage unless interest rates rocket to 6 per cent; he would not only have to shoulder a redemption penalty of £1,300, but he would also have to pay arrangement and professional fees. However, a fixed rate would give him the security of knowing exactly how much his monthly repayments are.
Brian wants to buy a third property next year. This is feasible, assuming he rents out both his current properties: he should have no difficulty in raising a loan at about four times salary. However, I would advise Brian to exercise caution in the buy-to-let market, as his debt levels in relation to salary are on the high side. MyMortgageDirect: 0800 953 0606
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