The recent rate rise, from 3.5% to 4%, has prompted many to now opt for a longer term fixed rate. My perception is that this was never a temporary blip, the economy simply settling down; I think rates will rise and continue to rise, therefore longer term fixed is the way to go.
This is what we are recommending to a client who has just agreed a deal in North West London. The bulk of the funds will be coming from the refinance of his unencumbered residential property, which will be refinanced on similar terms. He also has a fair amount sitting in the bank simply diminishing in real terms as time goes on.
One solution would be to take a conventional fixed rate on both properties to fund the purchase, and leave some of the money in the bank as a rainy day buffer. Another, more elegant, solution would be to take a fixed rate overdraft facility on the house, and have no money in the bank. It makes no sense to be paying 4-5% for borrowing money, whilst you have funds sitting in the bank earning a only a fraction of this rate.
This will be our proposal. Furthermore, following the recent rate rise there is an urgency to process the application and secure the long term fixed rate, as the rate rise will be filtering down into the mortgage products. There will be a small window of opportunity, if we can get our foot in the door early and secure the product.
This particular client lives and therefore chooses to invest in his local area of Wembley. He comes from Diu, a Portuguese colony, this gave them the right to go to Portugal and then make their way to London which was the ultimate goal.
The purpose of the investment is to secure his children’s future, and the tendency is to simply invest close to where they happen to live. The objective is capital growth, therefore which location will provide the most capital growth over the coming five years? I’m sure Wembley will do well, no doubt, it is flush with brown money and therefore prices generally tend to rise, and rise well, in these locations.
However, is there a location which has a more aggressive future growth rate? I think there is. There is a comfort factor to having the property in close vicinity to where you live, you can micro manage it and keep an eye on it. This slight benefit serves to misalign the objective. The aim is growth. There are ways to minimise the potential problems of buy to let property; for example, one is to purchase in a well managed block, another is to take out rent guarantee insurance on the tenant. These two factors alone will neutralise many of the problems residential landlords tend to face.
Having an overdraft facility will allow this landlord to purchase not only this property, but another, which we intend to propose to him. One which we strongly believe will have a more aggressive growth rate. It will be interesting to see at the end of a 5 year period which one has worked harder for him.