Buy to let investors taking a chance on tracker mortgages

08 October 2009 / by Rachael Stiles

Buy to let investors have shown a growing trend for choosing tracker mortgages, according to Legal & General's latest Mortgage Purchase Index.

The lender's seventh index, which analyses thousands of mortgage applications made through L&G, shows that more property investors are choosing tracker mortgages.

In quarter three of 2009, 30 per cent of buy to let mortgages taken out had variable rates, up from 13 per cent in quarter two.

The same trend can be seen in the wider mortgage market, but not to the same extent, with 17 per cent of residential borrowers opting for a variable rate in quarter three compared to 12 per cent in the previous quarter.

Explaining the move towards these kinds of mortgages, away from fixed rate mortgages,  Stephen Smith, Director of Housing at Legal & General said:

"There has been a distinct shift towards tracker and variable rates by landlords but the move is less pronounced amongst residential borrowers." But, he added, "our data shows that landlords have traditionally preferred variable rates of one sort or another and that the big leap we have seen is from a low starting point. In Q1 last year, for example, over 60 per cent of buy-to-let mortgages were on variable rates."

But Mr Smith warns that higher interest rates are on the horizon, and that those choosing a tracker mortgage now ought to factor that into their decision. "Average two year rates have dropped from 5.46 per cent to 4.99 per cent, but three and five year rates are up 92 basis point and 103 basis point respectively," he said. "This indicates how strong the belief in the money markets is that interest rates will rise over the coming few years."

Mr Smith also warns against assuming that because some mortgage rates have come down, an end to the recession is in sight: "To a certain extent, the low-interest rate environment may be creating an illusion that the economy is ‘back to normal' and that the recession is nearly over. In fact, bank base rates at this current level are far from normal and things will not go on like this forever," he said.

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