Buy-to-let mortgages cost 55% more than residential mortgages

Many people bemoan the tax advantages buy-to-let investors have over first-time buyers and other homeowners.

No doubt you’ll have heard all the commentary after the Budget as to how the playing field has been ‘evened up’.

The fact is though that it costs buy-to-let investors far more to access money than it does for homeowners.

For example, the cheapest five year fixed rate mortgage at 75% loan-to-value will cost a homeowner 2.44% per year in interest. In comparison, it will cost a buy-to-let investor 3.79% (that’s 55% more!).

Using the Post Office’s rates as a direct comparison, a mortgage on the same terms as above would incur 2.55% interest per year if you were buying it to live in. If, however, you wanted to rent the property out, the interest rate would be 3.99%. Same lender, same money, but 56% more to a landlord than a first-time buyer or homeowner.

Then there’s the cost of the legal requirements regarding buy-to-let property that homeowners aren’t obliged to comply with e.g. gas and electrical safety checks, the requirement for smoke and carbon monoxide alarms and the new legionnaires assessment, to name but a few.

The supposed reasoning for this 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 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 a 10% deposit can borrow money cheaper than an experienced landlord with a 25% deposit.

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

The money borrowed would still be tax deductible if it’s used for the purchase of a rental property. Whilst most residential mortgages will require the capital to be repaid (as opposed to most buy-to-let mortgages that are interest-only) I know of at least one lender who offers interest-only residential mortgages up to 50% loan-to-value.

The fact is though, whatever your reason for buying, 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 rates.

(This article was featured in the Chichester Observer's property section on 23rd July 2015)

Clive Janes, CRJ Lettings.  www.crjlettings.co.uk

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