For over a year now it has been tough to get buy-to-let mortgages, banks have set ever higher hurdle rates for new lending; reduced LTVs, higher rental cover, and caps on the maximum number of mortgages provided. 

We took a cross-market sample of buy-to-let mortgages on offer as of 12 October 2009 to assess some of the implications, this is what we found.

• Average interest rate 4.77%, for the first 2 years.
• Average arrangement fees of 3.1%
• Average LTV 68%
• Average mortgage rate of BBR + 3.5% after 2 years.

So what does this tell us? Firstly, for the headline rates being offered of 4.77% you need to add on the arrangement fee of 3.1% averaged over 2 years, in effect giving a net cost of 6.42%. 

• Averages allowing for fees gives an interest rate 6.42% with LTV averaging 68%

This is an extraordinarily high rate of interest given the actual BBR of 0.5% and 3 month LIBOR averaging at less than 2%.  It seems banks are “milking” buy-to-let investors, especially when you consider the average of 6.42% interest comes with an average LTV of 68%, it seems that premium interest rates are being charged for very secure mortgages.

But it is the longer term that could be of more concern.  Typically the average buy-to-let mortgage today will revert to BBR + 3.5%.  This works out at 4% based on today’s BBR of 0.5%, which seems reasonable.  But within a few years, not long after the typical initial 2 year mortgage lock-in period, BBR could be at 2% or more, thus borrowers could be paying 5.5% minimum, and this could rise to around 9% if we go back to the “normal” mortgage rates of just a few years ago.

In summary, the typical tracker mortgages with BBR +3.5% (or more) may seem cheap today but you could be locked into a very expensive mortgage as the bank base rate starts to rise (which it will) – so make sure you look after your “credit profile” should you wish to re-mortgage away from one of these products in a few years time.