Some of the latest mortgage products for landlords are aimed at those with a deposit of just 15 per cent – but is this deal too good to be true?
These products with loan-to-value rates as high as 85 per cent are only being offered by a handful of lenders.
In this article we take a look at how different deals compare, and how certain factors could mean landlords are be better off paying a higher deposit.
Before the credit crisis a decade ago, it was commonplace for lenders to offer deals to landlords with a smaller deposit.
But a small deposit means a smaller buffer against negative equity if house prices drop significantly.
And so after the financial crisis, the market adjusted, leading to most buy-to-let lenders typically requiring a deposit of at least 25 per cent. It means there’s a larger buffer if things go wrong in the future.
However, in a bid to attract landlords, lenders are now beginning to lower the amount of deposit they require.
At first glance, this may seem like a positive shift. However, further investigation reveals that the products have higher-than-average mortgage rates and arrangements fees. These costs reflect the higher risk that lenders are taking with these high loan-to-value products.
Property investors shouldn't overlook these high fees as they can eat into their profits.
Vida Homeloans is one mortage provider that's offering this deal as a two-year fixed-rate with a mortgage rate of 4.49 per cent and a five-year fixed-rate with a rate of 5.04 per cent.
There’s also a large arrangement fee of £1,995 on both of the products.
Further restrictions on the mortgage product include that it’s not available to first-time landlords, and it’s only available for loans up to £250,000 outside the M25.
Other buy-to-let mortgage lenders that offer deals for those with a deposit of only 15 per cent include Kensington Building Society and Kent Reliance.
Kensington has a lower rate of 4.39 per cent on its two-year fixed-rate deal, but there’s an arrangement fee of 1.5 per cent.
This rate increases to 4.49 per cent if landlords opt for the product with a flat arrangement fee of £1,999, and to 4.74 per cent for no arrangement fee.
Meanwhile, Kent Reliance charges an arrangement fee of 2.5 per cent of the mortgage amount on its products for landlords with a 15 per cent deposit.
Its products offer a two-year fixed-rate deal with a rate of 5.19 per cent and a five-year fixed-rate at 5.29 per cent, which is marginally higher than what’s being offered by Vida Homeloans.
Once the high arrangement fees are factored into the overall cost of a mortgage, borrowers may be better off selecting a deal aimed at those with a 20 per cent deposit.
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