Interest Rates for Buy to Let Mortgages

Buy-to-let mortgage rates are typically 0.5 to 1% above the Standard Variable Rate (SVR) the bank offers to its customers – this additional amount is to pay for the perceived additional risk of lending to Landlords with rented residential property. The SVR is typically about 1% above the Bank of England (BOE) base rate. This rate is considerably cheaper than a commercial lending rate that is normally 1.25% to 1.75% above the SVR (e.g. 2.25 to 2.75% above the BOE base rate).

Fixed Versus Variable Rates

Almost all lenders will offer either variable rates (SVR) or fixed rates (fixed for certain periods). You can typically lock yourself into a variety of rates for 1-10 years. A common offering is a SVR with a 1 year discount to say 1.5% below the current SVR, with a “tie-in’ for 3 years – meaning a redemption penalty of say 6 months mortgage payments is payable if you change product before a period of 3 years passes.

This is a popular type of product because it means the first year is low cost, whilst you get the investment property stable with good tenants. After a year, the rate will go up to the SVR and after 3 years you have the option to cheaply re-mortgage with the same company or another. Some 80% of investors choose the SVR (rather than Fixed) – this is probably because the Fixed rate builds in an insurance/ cost premium and look a bit expensive to most investors compared to the SVR.

Some investors may also think interest rates will be lower than the “market” is predicting in future. Furthermore, many investors like to take advantage of discounted deals from re-mortgaging – since the UK financing market is competitive with many products, its often perceived to be better to keep options open rather than fix. Some banks also charge an administration fee for setting up a fixed rate product, and the fixed rate products normally have longer “tie-in” periods and sometimes larger redemption penalties if you were to change product. That said, they provide a predictable future cost and some people lock in to good low cost deals at the right time.

Term of Payments

The most popular payment period is some 25 years – some people choose 30 years, but this is not possible with senior investors, since the money normally has to be paid back by the time the investor is some 60 years old. You will normally have the option to have part interest payment and part repayment. Most investors choose interest payments only, to keep their short term borrowing costs lower, and to get greater exposure to the investment property market (e.g. higher borrowing and more property).

Endowments and Life Insurance

The requirement to get such coverage these days is less than in the early 1990s – the performance of such funds has generally been below average, and most people avoid them unless they are required to sign up to such a product – probably as added security for the lending bank. The common complaint of such products has been the high commission paid for selling the product in the first place (in the early 1990s, this was sometimes equivalent to 4 years of payments). Objective advice can be sought on such products from our panel of brokers be very careful.

<< Previous Page || Next Page >>