Why are buy-to-let mortgages so expensive?

Landlords are more than familiar with the credit crunch and its impact on the cost of buy-to-let mortgages. However, how many of us know what really is going on?

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The fact is that despite the Bank of England base rate coming down from 5.75% just over a year ago when the credit crunch first started, the cost of a buy-to-let mortgage has rocketed upwards from a pay rate probably averaging about 5.5% last year to that of 6.5%+ currently. Why is this? One of the main contributory factors has been the increasing costs of borrowing that banks and building societies face in borrowing the funds that they need to then lend to landlords in the form of a buy-to-let mortgage.

Much of the lenders funds were obtained from other banks and financial institutions who were more than happy to lend to each other. The credit crunch changed all this, suddenly these lenders were not sure how financially stable the other banks were and therefore whether they were going to get their money back. The cost of this interbank lending is measured by the swap rate. As you can see from these figures for swap rates they have gone up dramatically over the last year and particularly for medium term loans where rates have risen from under 5% to just short of 6%. These cost have then to be passed on to the poor old landlord in the form of higher mortgage rates.

The only silver lining for landlords of this competitive lending market is that if they do have any savings left after paying the mortgage; because banks are competing so heavily for limited funds; a landlord is likely to get a nice healthy rate on their savings account.