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RANT: Why do BTL mortgages cost more than residential ones?

Posted by Mark Harrison on May 4, 2007

BuyToLet (BTL) mortgages have been around for 10 years now, and in all that time, we’ve accepted that they were a bit more expensive than “residential” mortgages.

It was only recently that I thought to ask “why?”

The reasons that were originally given were that landlords were a “higher risk” – that owner-occupiers were less likely to default and run away, leaving the mortgage company with a problem that would take a long while and a lot of staff time to resolve. Landlords were perceived to be more likely to cut and run, since it was “only” an investment, not their own homes at immediate risk.

On this basis, it wasn’t unreasonable that lenders should charge a little more to landlords to balance out this risk. (If you take on more risk, you’ve got to aim for a bigger reward).

However, recent figures by the Council of Mortgage Lenders have shown that the reverse is true. If you look at the mortgages issued in the last 10 years, it turns out that owner-occupiers are more likely to default.

This gives mortgage lenders three choices:

  •  Stick to their own rules, and make BTL mortgages cheaper than residential ones
  • Admit that they are fleecing landlords and taking higher profits and lower risk
  • Admit that, actually, this is a “social engineering” scheme, designed to promote a policy of home ownership rather than landlord-tenant relations.

The third option might sound reasonable, even speaking as a property investor.

But don’t you think that, in a democracy, policies like that ought to be out in the open, discussed, debated and voted on???

And if it’s not the third one, what’s it going to be – an admission of fleecing, or price cuts?


2 Responses to “RANT: Why do BTL mortgages cost more than residential ones?”

  1. I think there are one or two reasons why the lenders do appear to charge more though there does seem to be a new trend of lower rates with an enormous arrangement fee. Quite how this fits in with the FSA’s rules on treating customers fairly remains to be seen.
    The buy to let mortgage is nearly always sold in interest only format and commonly without a repayment vehicle so it is possible they are seen as higher risk. In addition the lenders know that house prices can fall and they probably have fears of landlords with negative equity and void periods. From an investor point of view if things got really tough I would hand back the keys on my BTL well before my own residence.
    The other point where I think there could be debate is are they actually more expensive? Yes the rate can be higher but you can deduct the interest against your rental income for tax purposes thus making the true rate of interest lower.
    One last point which comes from the cynic in me It could just be that the lenders see the investor making money out of their loan so they want a bigger piece of the action.

  2. > they are seen as higher risk.

    They are seen as a higher risk? By who? Not by the council of mortgage lenders who have 10 years’ worth of data. Not by the vast majority of landlords I know who would fight tooth and nail to make payments.

    BTL properties are typically bought by people who want to take financial responsibility for their lives. I’d rather lend to those people than the ones who’ve been told to “get your feet on the ladder.”

    OK – there’s a tax break, but it’s a tax break to encourage people to become landlords and provide housing – not a tax break to encourage mortgage lenders to hoover up the excess cash.

    I think that the cynic in you is very similar to the cynic in me, though 🙂

    Note: John Gotelee is the IFA I have used for my last three mortgages. I don’t see HIM as part of the problem – quite the opposite!

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