12 Oct Buy-to-Let – Lenders Change Tack

Buy-to-let is changing. As tax changes have hit demand for buy-to-let mortgage holders, high street lenders are finding alternative ways to sweeten the deal. Lenders both high street and unregulated are finding ways to mitigate the new tax implications for landlords.

Although the change is quite small, it is visible and the simplest way to attract new customers has been to drop the interest rates. It appears to be working too as newcomers come on board in the buy-to-let market.

According to Moneyfacts, a reliable data service, the current average interest rate for a buy-to-let mortgage fixed for two years is 2.91%. This is down from 2.94% in January this year.

Buy-to-Let Rates Have Dropped

Longer fixed deals, such as those over a five-year period average is 3.45%. This is the same as in January. While on the face of it, it may seem that there is little to encourage the buy-to-let investor, the truth runs a little deeper.

Although interest rates were lower in June and the average rates were slightly lower at 2.88% for a two-year fixed-rate deal and 3.43% for a five-year fixed deal, other factors have influenced the market.

For a start, the Bank of England raised the cost of borrowing by a quarter of a percentage point. To keep the market enticing and to raise interest, the banks have absorbed this cost to remain competitive and this appears to be happening across the board.

Lenders Covering Associated Costs to Switch

Mortgage broker, Chris Sykes of Private Finance, has commented on these trends. He said that lenders know that landlords have been discouraged by the stamp duty surcharge on second homes and were gradually losing the capacity to offset their mortgage interest against profitability.

With this background, lenders are seeking to galvanise the market by modifying products to make them more attractive.

TSB recently cut rates across its buy-to-let range by up to 0.3% by up to 0.3 percentage points.

According to The Telegraph, Jonathan Clark of Chadney Bulgin, also a mortgage broker, says that lenders are also keen to close more buy-to-let deals. This is because the interest rate is typically higher than on a residential mortgage. Lenders are constantly looking for ways to sweeten these deals too.

Mr Clark also mentioned the higher stamp duty rates that are now levied on landlords. Combined with harsher tax treatment, lenders are looking to tempt new customers, luring them away from their current lenders by offering even more.

Many lenders will now cover the survey and legal costs that usually accompany these transactions. Landlords switching to a better deal also do not have to face associated costs with switching to a new deal.

Window of Opportunity

The window of opportunity, however, will not remain open forever. Low rates come and go. It is in fact expected that the rates will rise in the near future – a sentiment expressed by Rachel Springall from Moneyfacts. This will, in turn, affect the value of properties on the market too.

Your Move estate agent, Simon Cox, added that buy-to-let rates are currently exceptionally low. He warns that landlords should consider the follow-on rates once the original deal matures. These could be significantly higher, and, of course, this will also influence their taxes. Looking at the rates without considering the other factors is not the right way to explore or enter the current market.