Homeowners have enjoyed sub 1% mortgages since April (since dropping to as low as 0.81%), but now landlords can get in on the action as buy-to-let mortgage rates drop below 1% for the first time. Whilst the headline figure is certainly attractive, read on to understand why it might not be the cheapest option overall.
Other lenders are sure to follow, but it is The Mortgage Works that have become the first lender to offer landlords an interest rate below 1%, having introduced a two-year fixed rate product with an interest rate of 0.99%. A deposit of at least 35% is required, but the real sting in the tail is that it comes with a 2% product fee of the loan amount. Factor that in to the equation and you’ll pay more in fees over the two-year period than you will interest!
Weighing up the interest rate versus product fee will largely depend on the size of mortgage you are taking out. It is also why a mortgage broker can be invaluable in guiding you towards the right product. As an example though, a £300,000 property with a 35% deposit (£105,000) will mean taking out a mortgage of £195,000.
Over the two-year term of The Mortgage Work’s headline grabbing product, you would pay £3,861 interest alongside a £3,900 fee. There is also a £340 arrangement fee and £20 banking fee to be paid, equating to a cost of £8,121 over two years.
Instead of this, consider that Platform’s two-year fixed-rate mortgage may have an interest rate of 1.65%, but it comes with no fees. That means all you’ll pay over the same two-year period is £6,435 in interest; a saving of £1,686!
Personally, I prefer taking out five-year fixed-rate mortgages. Using the same example £195,000 mortgage as above, the cheapest five-year buy-to-let mortgage comes via Virgin Money. Their 1.67% interest rate and £895 product fee means paying £6,871 by the time the previous products’ two-year fixed rates will have ended. For me, that isn’t much of a premium to pay to provide the assurance of what my monthly payment will be for a five-year period, along with not having to deal with the admin of re-mortgaging again.
And whilst rates could of course fall further, meaning taking a further mortgage in two-years’ time could see you even better off in years three, four and five, bear in mind the time and energy this takes, as well as potentially the cost of instructing mortgage brokers and solicitors again.
As ever though, you need to consider your own circumstances when dealing with such matters. For instance, if you’re thinking of selling or wanting to re-finance sooner, you wouldn’t want to tie yourself in for a long period (which normally comes with exit penalties). Different lenders have different criteria too, so you’ll need to navigate this to match the best overall package for you.
All of the above is why it’s typically a good idea to consult with the professionals for independent financial advice, as a headline grabbing figure isn’t always as good as it first sounds.
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