Buy To Let Mortgage – What’s The Difference?

A surprisingly high percentage of first-time landlords make the mistake of researching homeowner mortgages when doing their initial sums. Unfortunately a homeowner mortgage and a buy to let mortage destined for the same property will have very different figures.

So what exactly are the main differences and how will they affect your finances?

Interest rates

 Although a lot of buy to let mortage providers are starting to reduce their interest rates they are still a good way above those of similar sized homeowner mortgages. At the present time (November 2011) the average homeowner mortgage interest rate is around 3.6% however the average buy to let mortage rate is closer to 5%.

Deposits

Again, a lot of buy to let mortage providers are starting to lower the deposit required to secure a mortgage but the majority still want between 25% and 40% of the property’s purchase price. Homeowner mortgages however are generally approved with a 15% or 20% deposit; a figure that makes them more affordable but still out of the reach of most first time buyers.

Arrangement Fees

The arrangement fees charged on homeowner mortgages are normally presented as a fixed fee i.e. the same fee regardless of the size of the mortgage. Some are charged at a cost of 1% of the mortgage amount but this method is falling out of use. Fixed fees range from £500 up to £1000 and very few go above this.

The arrangement fees charged on the typical buy to let mortage are customarily calculated as 3% of the loan amount, and in the few cases where a fixed fee is charged the fee is rarely less than £1500. It is possible to secure lower arrangement fees e.g. £199, but you will be required to pay a higher interest rate for a set period of time.

Early Redemption Penalties

A lot of homeowner mortgages no longer have early redemption penalties and those that do charge an average of 1% of the loan amount if you end the terms of the mortgage before a specific date. The average buy to let mortage charges 3-4% of the loan amount. As with the arrangement fees, the size of the early redemption penalty can be reduced if you are willing to pay a slightly higher interest rate though.

As you can see, the average buy to let mortgage costs a lot more, both in terms of interest and fees, than a similar sized homeowner mortgage. The reason for this is simple; mortgage providers see buy to let properties as a bigger investment risk, simply because of the need for reliable tenants to make rental payments that are then converted into mortgage payments. Unfortunately landlords have no choice but to live with this way of thinking and no doubt will have to do so for many years to come.