Landlords opt for five-year deals after PRA changes

Landlords have increasingly been switching to five-year fixed rate products over the past two years, new data from Commercial Trust Limited has shown.

Back in 2016, two-year fixed deals accounted for just under 68.5% of market share, while five-year deals were just over 23%.

However, borrowers have found it difficult to obtain the funding required following the introduction of stricter lending criteria on shorter fixed-term buy-to-let mortgage deals by the Prudential Regulation Authority (PRA).

“The report suggests that there has been a significant reaction to the changes brought about by the PRA rules in 2017,” Andrew Turner, chief executive at Commercial Trust Limited, commented.

“With five-year fixed rate buy-to-let products, borrowers are more easily able to maximise borrowing by taking advantage of lower, pay-rate deals and it is telling that we have seen a huge change in market share over a similar period of time to the PRA changes.”

In fact, the first quarter of 2018 saw the trend towards five-year deals gather momentum, accounting for just under 67% of market share compared to 28% for two-year fixed rate products. This increase was recorded in Q4 2016, when five-year deals first exceeded two-year fixed rates.

By Q1 2017, five-year deals accounted for just under 50% of market share, rising to 56% for the second quarter.

Around this time, landlords took the opportunity to review existing portfolios and make further investments ahead of a potential Bank of England base rate rise. By Q3 2017, the market share for five-year fixed deals increased to over 61% then rose further to 66% after in Q4 following the Bank’s base rate rise of 0.25% on November.

Turner added: “In the context of historic rates, there remain plenty of competitive buy-to-let mortgage rates available and we work with a wide variety of lenders who offer a broad range of products.”

He said investors are reliant on little knowledge of the buy-to-let mortgage space to overcome the challenges they are presented with. “But, with in excess of 50 lenders taking different approaches to the PRA stipulations, I would argue that the capacity to do this effectively lies with the resources of a specialist,” he said.