Using stepped buy-to-let mortgage rates to your advantage

Coin stacks

It can be easy to feel misled when lenders lure you in with a low rate five-year product, only to discover it is a stepped rate deal. However, there is a reason these products came about after the income tax changes were announced which may give you an advantage.

What is a stepped rate buy-to-let mortgage?

It is a product where the rate over the initial period changes each year. Products are usually advertised by lenders with the rate starting low, but rising by small increments each year.

What many landlords may not appreciate is that the stepping of the rate can be taken in descending order even though lenders advertise them in ascending order, so that rather than diminishing over the initial rate period it peaks at the end.

The product described in this article is from a specialist pay-rate lender:

The tax relief changes

The changes to tax relief are being phased in from April 6th 2017 when relief will be set at 75% of finance costs. For each subsequent year to 2020, the relief for finance costs on buy to let property will decrease by 25%.

In 2020 all financing costs incurred by individual UK landlords will be given as a basic rate tax deduction (reducing relief to zero).

Why would I opt to reverse the stepped rate?

If you were to take out a stepped buy-to-let mortgage over 5 years now, by reversing the stepping of the rate you would mirror the increase in tax costs with a reduction in monthly mortgage payments which may help mitigate some of the loss in income caused by the removal of the tax relief.

5 year stepped fixed rate

One of the specialist lenders we work with has recently brought out the following stepped buy-to-let mortgage.

The deal averages a rate of 3.5% across the initial period which, for a 5-year deal is a great rate.

Limited Edition 5 year fixed rate buy-to-let mortgage
Stepped rates Product fee ERC* APR**
3.00% until 30/06/2018 2.00% 5% to 30/06/2019 5.10%
3.25% until 30/06/2019 4% to 30/06/2021
3.50% until 30/06/2020
3.75% until 30/06/2021
4.00% until 30/06/2022

Reverting rate is LIBOR +4.75% per annum

*ERC = Early Repayment Charge
**APR = Annual Percentage Rate (calculated using hypothetical loan amount of £150,000)

Apply for a stepped rate buy-to-let mortgage

Reverse the stepping of the rate to mirror the tax relief withdrawal

If you started the 5-year initial period with the 4.00% rate and reduced the repayment rate over the 5 years, to reverse what you see illustrated above, by 2020 (when all tax relief is withdrawn) your repayments will be calculated on the lowest rate offered by the product.

Product criteria

  • Properties in England and Wales
  • Maximum loan size of £2,000,000
  • Applicant minimum age at application 21 years, maximum age at term end 80 years
  • Interest coverage ratio 125% at 4% or product charging rate if greater
  • Not available to expatriates

Please remember, limited edition products can be withdrawn at any time, enquire now to avoid disappointment.

Call our advisors or enquire online to see if this stepped rate buy-to-let mortgage product could work to your advantage.

Enquire online

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.