A little-known bank has sent shockwaves across the buy-to-let mortgage market after launching a deal with a 3.9 per cent interest rate.
State Bank of India’s UK arm, SBI UK, is behind the market leading rate, which is available to buy-to-let investors only.
Its 3.9 per cent two-year fix is available to those buying a property at 50 per cent loan-to-value. This means they will need a minimum deposit of 50 per cent to be eligible.
This is not only the lowest rate on the market, it is miles ahead of the market norm. According to Moneyfacts, the average two fixed rate buy-to-let mortgage is 6.48 per cent.
State Bank of India’s UK arm, SBI UK, is behind the market leading rate, which is available to buy-to-let investors only
On a £200,000 interest-only mortgage, SBI UK’s 3.9 per cent rate would equate to £650 per month compared to the market average of £1,081 per month.
However, there is a major drawback that may mean the SBI UK deal is not the cheapest product for buy-to-let investors overall.
This is because it has a huge 5 per cent product fee. This can either be added to the mortgage or paid upfront.
This means that someone taking out a £200,000 loan would be charged £10,000.
Deals that have far higher rates, but lower fees, may ultimately cost less overall.
For example, Virgin Money has a 4.87 per cent deal available to those buying with a 40 per cent deposit, which comes with a smaller fee of £3,000.
Those who opt to add the fee to the mortgage will of course save on the monthly payments by opting for the Bank of India deal. However, they will likely end up with a larger outstanding mortgage at the end of the fixed period, which ultimately means it will cost more.
Nicholas Mendes, mortgage technical manager at broker John Charcol, says: ‘This is a shock rate announcement from the State Bank of India. At first I wasn’t sure it was correct. No other lender has broken the 4.5 per cent barrier, let alone 4 per cent.
‘Having spoken with the lender, it’s not going to stick around for long, as they have a small tranche of funds for this deal and is very much a positive statement to put out in the market.
‘A two-year fixed rate up to 50 per cent loan-to-value at 3.90 per cent has become a best buy overnight.
‘The big issue with this deal is that they charge a hefty fee compared to competitors, which range between 1 per cent and 3 per cent.
‘When factoring in the 5 per cent arrangement fee this is by and large in line with competitors who are sitting at the top of the best buys, although their fixed rates are nearly 1 per cent more compared to SBI’s new rate announcement.’
Should buy-to-let borrowers consider SBI UK’s deal?
Whether or not property investors should consider it or not will come down to the overall cost and their own personal circumstances. To establish this, they’ll probably need to speak to a mortgage broker.
You can also work out how much your monthly payments would be using our mortgage calculator.
Talk to a broker: Landlords should seek advice about whether the mortgage is right for them
Some borrowers may also be wary of having a mortgage with a bank they may never have heard of such as SBI UK, but given it is a fully authorised and regulated UK bank there shouldn’t be much to fear, according to Mendes.
‘UK banks go through rigorous checks to receive a banking licence, and shouldn’t be discounted on the fact they haven’t been heard of before.
‘We are continually seeing new lenders come onto the market looking at ways to disrupt the mainstream, through different criteria or attractive rates.’
