Competition in landlords sector means costs mirror residential home loans
Falling interest rates on buy-to-let mortgages are getting closer to those offered on residential home loans as competition between lenders for new customers intensifies.
Mortgages services granted to landlord investors traditionally carry higher interest charges than those for owner occupiers, compensating lenders for the additional risk that landlords could default on loan repayments if their tenants do not pay the rent.
However, the gap between the two types of loan has narrowed substantially in 2019, according to data from finance website Moneyfacts. Since the beginning of this year, the difference between buy-to-let and regular residential loans shrank from 0.76 to 0.62 percentage points based on average rates charged for a two-year fixed mortgage with a 75 per cent loan-to-value (LTV) ratio.
Santander recently cut the rate on its five-year fixed rate buy-to-let mortgage to 1.79 per cent, based on properties with an LTV of 60 per cent. On Tuesday, Virgin Money dropped rates across a number of its buy-to-let deals, reducing its two-year fix to 1.78 per cent for properties with an LTV of 60 per cent.
Nick Morrey, product technical manager at mortgage broker John Charcol, said the gap between rates on the cheapest buy-to-let and residential interest deals was about half a percentage point narrower than it had been historically, and was likely to become even closer as competition intensified.
“I can’t see [interest rates] achieving parity because [buy-to-let] is intrinsically a more risky form of lending,” he said. “But will the pressure continue? Yes, until the economy picks up.”
One of the reasons for hotter competition in the sector is the increased popularity of longer term fixed-rate deals, as people lock into low rates amid an uncertain economy. In a speech last week, Christopher Woolard, director of strategy and competition at the Financial Conduct Authority, said five-year fixed mortgage deals now accounted for nearly half of all fixed rate sales, a market where two-year deals once dominated.
The knock-on effect is that borrowers are having to rearrange their fixed-rate deals less often, reducing the number of available customers to whom lenders can sell new deals, and boosting competition.
Mr Woolard said: “Intense competition means low prices as lenders cut rates to stay in the game — good news for borrowers. But it also means that lenders look to other areas of the market for growth.”
Around two-thirds of lenders offer both buy-to-let and residential loans, but there are also lenders specialising solely in the landlord mortgage business.
Another factor behind falling buy-to-let interest rates is that landlords have been in retreat from the sector since the introduction of higher stamp duty in 2016 and the withdrawal of higher rate tax relief on mortgage interest.
Aaron Strutt, product director at mortgage broker Trinity Financial, said: “The gap between residential and buy-to-let pricing has gradually been reducing as demand for buy-to-let has dropped off. Lenders are trying even harder to make their rates cheaper to tempt people in.”
Lenders are currently targeting the remortgage market, he added, offering their existing landlord borrowers more generous rental calculations on affordability if they agree to remain with them.
However, arrangement fees are typically higher for buy-to-let deals. Barclays, for instance, is currently offering the lowest two-year fixed rate buy-to-let deal at a rate of 1.35 per cent, based on an LTV of 60 per cent — but it carries a fee of £1,795.
A similar residential mortgage deal on the market with NatWest at a rate of 1.19 per cent carries a significantly lower fee of £995.
Darren Cook, finance expert at Moneyfacts, said the risk of default underpinned the difference in rates between residential and buy-to-let mortgages services and tax effects.
“Both have the usual affordability checks, but buy-to-let mortgages have an added component of . . . a provider assessing risks associated with the rental market and the economic threats that may occur in this sector.”
“Providers seem to be willing to sacrifice a portion of risk attributed to future default to gain a competitive edge.”