How to choose a Buy to Let mortgage based purely on cost

by Neil Patterson

6 years ago

How to choose a Buy to Let mortgage based purely on cost

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How to choose a Buy to Let mortgage based purely on cost

Firstly to give a level playing field you need to make two assumptions:

  1. You have decided on the type of rate Fixed or Variable e.g. both products will be the same (see previous article) To fix or not to fix.
  2. You would like an interest only mortgage

Next you need to decide over what period of time you would like to compare the cost of the products. You need to consider longer term strategy that will affect your mortgage decisions such as plans to raise capital, pay lump sums off, sell, remortgage etc.

In this example I will compare products over a 5 year term for a £100,000 loan amount

Product 1:

3 year product term at 4.29% with a reversion rate of 5.99%
2.5% arrangement fee added to the loan

£100,000 x 2.5% = £2500 therefore total loan amount = £102,500
Total interest paid = (102,500 x 4.29% x 3 years) plus (102,500 x 5.99% reversion rate x 2 years) = 13191.75 + 12279.50 = £25471.25

Therefore cost over 5 years = £25471.25 interest plus £2500 arrangement fee = £ 27,971.25 total

Product 2:

5 year product term at 4.99% with a reversion rate of 5.65%
£999 arrangement fee added to the loan

Total loan amount = £100,000 + £999 = £100,999
Total interest paid = £100,999 x 4.99% x 5 years = £25199.25

Therefore cost over 5 years = £25199.25 interest plus £999 arrangement fee = £26,198.25 total

In this example not only is product 2 cheaper over 5 years, but the loan amount you will be paying interest on beyond this term is £1,501 less thus increasing the saving over the long term.

To find current products, costs, terms and how much you can borrow try our free buy to Let mortgage calculator

For more articles like this please see our Buy to Let Explained section

Comments

6 years ago

Neil,
       Until recently most people haven't paid that much attention to what happens after the initial fixed/discounted period as they've been looking to re-mortgage. Obviously that's not happening at the moment due to the banking situation, so I think it's really helpful to see possible scenario's broken down in this manner to give us an idea of where to go and what to do next. The result is also a surprise when seen written down. Keep up the good work.

John 

Julian

6 years ago

Simple but effective advice - easy when written down but suprisingly difficult when trying to put together a simple spreadsheet yourself !

Many thanks

Paul Barrett

6 years ago

All very interesting and wonderful to conjecture what deals might be.
If I was looking at a mortgages deal I would be looking for the cheapest I could get then proceed onto a BOE tracker rate , ideally 1% aove BBR for the longest term possible.
The big risk to having to be in a position of needing to remortgage to make the property loan still work are 2 risks.
The possibility of IO BTL mortgages finishing and the EU BTL regulation constraining BTL mortgages to  only those whose income can support an additional mortgage.
These 2 issues would be my principal concern, anything else is really irrelevant.
I would not wish to be put at risk of losing a property if I did not have a guaranteed continuation mortgage facility on taking out a mortgage product.
Those who do not are taking a big gamble that there will be the facility to remortgage under existing criteria.
I am sure lots of residential mortgage borrowers thought the same way.
They are now effective mortgage prisoners and most have negative equity.
They are now paying increased interest on an asset that is currently worth less than the mortgage.
With the change to residential mortgage criteria it is unlikely for the next 20 years that there will be sufficient income to afford to  move on.
Such borrowers are left with little choice than to sell at a loss or rent out their PPR and rent where they need to be.
They are also stuck on continually rising SVR's which take no notice of the BOE interest rates.
The BOE could drop the rate to 0%; you would still have greedy banks paying derisory savings interest rates and charging mortgage borrowers 4-5 %.
Whatever happened to the standard margin that most banks used to operate on of 1%!?

Mark Alexander

6 years ago

Paul, rates of base plus 1% and interest only were and window of opportunity during a decade of madness. I would suggest 75% LTV, repayment over 15 years and bank base plus 3% is a more realistic long term norm if you take averages and strip out 1997 to 2007

Paul Barrett

6 years ago

If that was the standard I would be bankrupted and homeless along with many thousands of other BTL LL and homeowners.
Until the madness of that decade is inflated away the market will not be restored.
I reckon 20 years or more for that to occur.
And wages will need to double.
Fortunately I had to sell my PPR which I would not have been able to pay the mortgage off by the mortgage end.
I needed to pay the IO mortgage off by 2018.
On my pension no chance.
There are many homeowners who had no choice but to obtain a IO mortgage as they could not afford on on a repayment basis.
Nobody could predict a credit crunch and people still had to live somewhere and purchase was the  majority way of finding a place to live in.

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Iain Duncan Smith MP at National Landlord Investment Show London