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13 Oct 2019

Buy-to-let mortgage cashback boom: should landlords be enticed by 'free' money?

A third of remortgaging deals for landlords come with cashback incentives

A third of buy-to-let remortgaging deals now come with cashback, but is the promise of 'free' money too good to resist?

Exclusive Which? research shows that mortgage lenders are increasingly looking to entice investors when they refinance their portfolios, with some deals boasting bonuses of up to £1,000.

Here, we explain how fierce competition on mortgage rates has led to a cashback boom, and offer advice on whether you should be tempted by these seemingly lucrative incentives.

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The buy-to-let cashback boom

We've analysed data from Moneyfacts and found that the percentage of buy-to-let mortgages offering cashback has increased rapidly this year, with banks focusing on landlords looking to remortgage.

At the start of 2019, a quarter of fixed-rate mortgages came with some form of cashback. Now, it's just under a third of deals.

And most significantly, the percentage of remortgaging deals offering a cash bonus has increased by the same margin in the space of just 10 months.

The chart below shows how these incentives have become more common in the buy-to-let market.

How much cashback are banks offering?

This varies from lender to lender. Currently, the smallest incentive is £250 and the most generous is £1,000.

The three most common cashback amounts are £250, £300 and £500.

Find out more: buy-to-let mortgages explained

Do the cheapest deals come with cashback?

At 60% loan-to-value (LTV), four of the 10 cheapest two-year fixed-rate deals come with cashback. This figure rises to eight out of 10 on remortgaging deals.

At 75% LTV, none of the top-10 deals for buyers have incentives, while just two of the top-10 remortgaging deals do so.

The incentives on offer range from £250 to £500.

However, it's worth keeping in mind these bonuses are dwarfed by the upfront fees on all of these mortgages, which range from £1,295 to £1,995.

Lenders offer bigger incentives on five-year fixes

Five-year fixes have become much more popular over the past couple of years, and they now make up 46% of all buy-to-let deals.

And with more borrowers looking for long-term rate security, this is now the main battleground for lenders looking to offer the best rates.

At 60% LTV, seven of the 10 cheapest deals come with cashback of between £400 to £500 for buyers, while eight out of 10 do so for remortgagers.

Banks moving away from fee-free mortgages

We mentioned earlier that up-front fees on the cheapest deals can be very high, so it makes sense to take a look at the best fee-free deals.

Unfortunately, the percentage of mortgages with no upfront fees hasn't risen very much at all in 2019.

A fifth (21%) of buy-to-let mortgages are available with no up-front fees, only marginally up on the 20% recorded at the start of this year.

And when we look at the top deals at different LTVs, none of them are available fee-free.

Rate battle results in cheaper deals

Fee-free deals are very expensive for lenders, especially when so many banks are battling for business.

Instead of reducing fees, lenders are instead cutting rates on their buy-to-let deals.

Since the start of the year, the average rate on a buy-to-let fix has fallen by 0.15%, as shown in the graph below.

It's been a similar story when we look at the cheapest mortgage rates available, too, as shown in the tables below.

Two-year fix

January 20191.4%1.69%
October 20191.35%1.55%

Five-year fix

January 20191.99%2.44%
October 20191.86%2.12%

As you can see above, the top rates have fallen across the board, with five-year fixes at 75% LTV dropping by a third of a percent so far this year.

There's also plenty of choice for borrowers in this space - just 0.05% separates the top 10 75% deals.

Should you be drawn in by cashback incentives?

The promise of extra cash in your pocket is certainly attractive, but in truth, cashback is a bit of a red herring when comparing mortgage deals.

After all, there's a limited benefit to getting £300 cash back when you're paying an upfront fee of £1,995 to set up the mortgage.

With this in mind, consider cashback incentives as a 'nice to have', rather than a deal-breaker.

Instead, focus more closely on the quality of the lender, the initial rate, and any up-front fees and early repayment charges (the latter is especially significant if you're taking out a five-year fix).

If you do choose a cashback deal, be aware that you might have to wait until a few weeks to get the payment, with lenders generally paying cashback out within 14 to 28 days of the mortgage start date.

Using a broker to find a buy-to-let mortgage

Finding the right mortgage can be a complicated business, and it's getting more difficult to separate the deals from the duds.

Our research shows that the number of buy-to-let mortgages on the market has increased by 9% so far this year.

The majority of buy-to-let mortgages aren't available directly to customers, so approaching a whole-of-market mortgage broker could help you get a better rate.

Of the 2,452 mortgages currently on the market, only a fifth (21%) are available directly, while three-fifths (64%) are only available through mortgage advisers.

Some deals are only on offer to select panels of intermediaries, so ensure that your chosen adviser has access to the full market.

Advice on buy-to-let mortgages

Before taking out a buy-to-let mortgage, you should spend some time acquainting yourself with the specifics of how these deals work, as they're very different to normal residential loans.

To learn more about the rules and regulations, how to borrow as a limited company, and what to do if you've become an accidental landlord, check out our full buy-to-let mortgage guide.