More and more incentives are being offered to buy-to-let (BTL) mortgage borrowers looking to switch their BTL mortgage borrowing from one provider to another. But how worthwhile are freebies to so-called ‘rate tarts’ when looking at the cost of the mortgage over the longer term?
Alan Harper, Senior Researcher from moneyfacts.co.uk comments:
“It’s human nature that people are attracted to ‘freebies’ and buy-to-let lenders have not been slow to catch on to this idea. Of those buy-to-let lenders with products available direct to the general public, nearly forty - three times as many as around three years ago - currently offer an incentive of one sort or another as a means to lure customers from their competitors. These freebies are usually free or reduced valuation fees or legal fees, or cashbacks, and typically could be worth anything up to £1,000, depending on the provider and the product chosen.
“A saving of that size can provide landlords with a useful bounty to invest in property improvements, for example. But shrewd borrowers would be well advised to look at the whole picture since unsurprisingly lenders will often recoup the value of these freebies some other away, perhaps via higher interest rates or application fees.
“Moneyfacts.co.uk examined the cheapest variable rates for a loan of £100,000 on a property worth £150,000 and based our calculations on the assumption that the borrower kept the same product for ten years. The net result is that over the longer term, the value of the incentives is wiped out. In fact borrowers could end up paying slightly more on products with an incentive than on comparable products without one.
“With remortgage incentives almost becoming the norm rather than the exception, consumers would be well advised not to be swayed solely by short term offers without taking appropriate financial advice to ensure they take the right deal to fit their circumstances.”
The tables in the appendix show how the costs of variable rate products on an interest only basis compare for a mortgage of £100,000 on a property valued at £150,000. Data correct as at 15 March 2006. Tables exclude products available only through mortgage intermediaries.
Table 1:Variable rates for term, no remortgage incentives, true costs calculated on an interest only advance of £100,000 over ten years, property value £150,00
Table 2:Variable rates for term, with remortgage incentives, true costs calculated on an interest only advance of £100,000 over ten years, property value £150,00
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