Investors could be forced to take long-term mortgages

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Changes to the buy-to-let finance regulations could mean that landlords will take out longer term commercial mortgage deals, says a November 2016 article.

Many landlords take out two-year fixed interest commercial mortgages because they are offered at cheap rates. However, regulators are concerned that investors could commit to too much debt and, if interest rates rise, they could struggle to make payments. The Bank of England has asked lenders to introduce more stringent affordability checks or stress tests on borrowers.

The typical interest rate for a two- or three-year fixed mortgage is 3.4% interest, as of November 2016. To obtain a new short-term mortgage under the new stress test rules, landlords need to prove that they can afford to repay the mortgage if the interest rate rises to 5.5%. They will need to prove that the rents they receive on buy-to-let accommodation will cover any increases in interest rate.

Some lenders may only offer longer term fixed rate mortgages of five years or more. Many lenders do not impose affordability checks on long-term loans that are as strict as those for short-term loans. Taking out longer term loans will initially cost more for borrowers, but they will have the security of knowing that they will be able to afford the mortgage payments. They will also save on the fees incurred when they regularly remortgage.

According to the website Moneyfacts, there are 421 five-year commercial mortgage deals currently available, and this is up by a third compared to last year.

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