Borrowing for an Investment Property is Now Cheaper

The increasing competition in the UK mortgage market coupled with government schemes to encourage more affordable lending have resulted in the mortgage interest rates falling significantly. Some of the deals available are now the lowest they have been for many years.

The Funding for Lending and Help To Buy government initiativeswere aimed at stimulating lending to individuals wishing to buy a home and also to small businesses. However, a by-product of these schemes, particularly Funding for Lending, is that we are seeing noticeably morehighly competitive ‘buy to let’ mortgage deals out there. It seems that banks and building societies are more than happy to giveinvestors low interest rates even when they do not have a large deposit to put down and this has resulted in an increased supply of good value buy to let mortgages.

So investors are benefiting from low interest rates without having to tie up too much of their capital. The difference between interest rates for those with a 25 per cent deposit compared to those with a 35 per cent deposit has now halved making it significantly cheaper to get a 75 per cent loan-to-value mortgage than two years ago. In early 2012, an investor with a 25 per cent deposit could expect to pay an interest rate 1 per cent higher than someone with a 35 per cent deposit. Now, the average difference is under 0.5 per cent.

This seems to suggest that lenders are keen for a slice of the buy to let business, a suggestion reinforced by the fact that banks are keeping fees as low as possible for potential landlords looking for a mortgage deal. When an investor takes into account all the costs of purchasing an investment property, such as banks fees and charges, valuation costs and solicitor's fees they will be paying less now than 2 years ago.

Naturally, this is good news for new landlords or those looking to expand their property portfolio as they typically seek to preserve their capital under their own control and borrow as much as possible from the banks. It is a positive sign for the buy to let market that banks are very willing to lend 75 per cent of the purchase price and reflects a more realistic way of looking at where interest rates and property prices will go in the future.

Fixed rate deals on longer terms (5, 7 or even 10 years) are still higher than 2 year fixed deals and could rise even higher as they become more popular as investors aim to avoid coming out of a fixed deal at the point when the Bank of England Base rate is increased from its historic low of 0.5 per cent. This could be a way for banks and other lending institutions to increase their profit margins again.

These data are backed up by a new survey of mortgage brokers published in Mortgage Introducer that revealed that 95 per cent of those mortgage advisers questioned thought it was a good time to invest in property and more than 50 per cent of them thought that securing a large buy to let mortgage was not difficult. A large majority of the brokers also thought the buy to let market would continue to grow.