Cost of Low Deposit Investment Mortgages

Interest rates on home loans in the UK have been steadily dropping since 2012 assisted by competition between lenders and government schemes such as Funding for Lending and Help To Buy. Rates on residential loans are sitting at historic low levels as the UK economy begins to display signs of recovery and a boost in confidence.

The government program’s were implemented in order to encourage banks to lend to households and small businesses at more affordable rates and with less stringent lending criteria. However, these schemes are also having the positive effect of increasing the supply of highly competitive ‘buy to let’ mortgages. It appears that many lending institutions are much keener to offer landlords good interest rates for higher loan to value mortgages meaning that landlords can borrow with a smaller deposit than has been the case since the start of the recession in 2008. This has resulted in an increased supply of buy to let mortgage deals available with smaller deposits.

So just how are landlords benefiting from improved buy to let home loans secured with a smaller deposit?

Many of the major lenders and also smaller building societies and private banks are increasingly targeting buy to let mortgage borrowers at increasingly high loan to value percentages and at competitive interest rates according to a report by specialist company Mortgages for Business. This report revealed that the difference between interest rates on 75 per cent buy to let mortgages and 65 per cent loans is half what it was in 2012.

In early 2012, 75 per cent loan to value mortgages for landlords had interest rates approximately 1 per cent higher than 65 per cent mortgages. Now, the differential in the average rates between these two types of loan is only 0.46 per cent.

The report also suggested that banks and building societies were also offering more competitive arrangement fees to entice borrowers seeking buy-to-let products. The only exception noted was that interest rates on long term fixed rate loans were rising, perhaps as a reflection of the expectation that the base rate will rise in the next few years.

Taking into account all the costs of buying a property: arrangement fees, valuation and legal fees, the average buy-to-let mortgage rate dropped by 0.25 per cent between 2012 and 2013.

Naturally, this is good news for existing or aspiring landlords in the UK because it suggests that banks and building societies have an increased appetite to offer buy to let mortgages at higher loan to value percentages. With many investment borrowers looking to borrow as much as they can in order to retain control of their capital this is certainly a positive development.

It is preferable to only put down a 25 per cent deposit rather than a 35 per cent deposit when purchasing an investment property if the difference in interest rates between the two deals is less than half a per cent, which is what investment borrowers are currently seeing with large mortgages in the marketplace. However, it is likely that lenders will increase fixed rate offers on buy to let mortgages in the near future, in particular those over longer terms such as 5 years or more in an attempt to improve their profit margins.