Great mortgage mystery: Buy-to-let products can cost 60 per cent more than residential mortgages

Chichester Buy To Let Market

I met up with my mortgage broker to discuss re-mortgaging one of my buy-to-let properties whose mortgage was about to move onto its (not very competitive) Standard Variable Rate.

It gave me a chance to compare the various mortgage products out there, whilst bemoaning the fact that banks lend money to homeowners cheaper than they do to landlords.

For example, the cheapest five-year fixed rate mortgage at 75 per cent loan-to-value will cost a homeowner 1.74 per cent per year in interest. In comparison, it will cost a buy-to-let investor 2.79 per cent (that’s 60 per cent more!).

The bizarre thing is that the lender in both these examples is HSBC. So it’s the same lender using their same money, with the same amount of equity put in by the buyer, but the bank will charge 60 per cent more to a landlord than to a first-time buyer or homeowner.

The supposed reasoning for this discrepancy is that buy-to-let mortgages are ‘riskier’ to the lender. With thorough tenant referencing and even rent protection insurance, is this really the case though, versus a first-time buyer who may have no experience, nor the budget leftover, of running a property?

In fact, the lending rates are so misaligned that a first-time buyer with just a 10% deposit can borrow money cheaper than an experienced landlord with a 25 per cent deposit!

Whilst I’m not financially qualified to give advice, it is clear that a landlord who wishes to borrow money to invest in a buy-to-let property would be wise to evaluate whether this can be done by drawing equity from their own home first. This would allow them access to the preferential rates on offer, rather than automatically going down the more expensive buy-to-let mortgage route.

The money borrowed is still tax deductible in the same way as a buy-to-let mortgage would be, if it’s used for the purchase of a rental property. And whilst most residential mortgages require the capital to be repaid (as opposed to most buy-to-let mortgages that are interest-only) there are some interest-only residential mortgages available if you have enough equity in the property.

The fact is though, whatever your reason for buying a property, it has never been so cheap to borrow money. The biggest issue people face is raising the large deposit, alongside jumping through all the hoops necessary to access the best mortgage rates.

About the Author

Clive Janes
Clive Janes is the author of the Chichester Property News and owner of CRJ Lettings.