Interest rate rises earlier this year hit the Buy to Let market hard, given that affordability for these clients is based almost entirely on a direct calculation of the rental income compared to the monthly mortgage payments.
However, lenders have responded with the launch of new products that are structured with a higher fee and lower rate to help more landlords to achieve the leverage they need within stress testing requirements. On top of this, rates are also starting to fall, opening up the market to a wider number of investors.
When it comes to mortgage payments, a Buy to Let mortgage would typically work on the basis of a stress test of 125% of the rental income on a 5-year fixed rate. By introducing products with higher fees but lower rates to introduce monthly costs a lot of investors can now achieve up to 75% LTV, which would otherwise be unachievable at higher rates.
Sometimes brokers are deterred by high product fees, but when talking to your clients about these products, it’s important to look at the overall cost of borrowing over the period of a 5-year fixed rate rather than the headline figure, as this is often the same as products with a lower fee.
For example, a 5-year fixed rate of 5.2% with a 7% fee has an overall cost of borrowing over the five-year period of 33%. A 5-year fixed rate of 6.2% with a 2% fee also has an overall cost of borrowing over the period of 33%.
The fee may seem to be expensive, but over the life of the deal, the cost of borrowing is practically the same. The benefits of this approach are that the product with a lower rate and higher fee enables a borrower to achieve a larger loan size that may be needed to secure the leverage they want to make an investment work. The larger fee may initially put some off, but it’s a useful tool and does not necessarily lead to more expensive borrowing.
There can also be advantages to paying more on a fee over rate due to the way it can be offset for tax purposes, but as always, it’s important for investors to seek specialist property tax advice.
At Brightstar, we are seeing an increase in demand from Buy to Let investors as we move into 2024 and the diverse range of products available offers them more options. We’re available to talk through all of these options and discuss the approach that best suits your clients.
Neil Taverner, Complex Buy to Let Specialist Consultant
