Buy-to-let mortgage lender launches market-leading 3.9% rate… but there’s a BIG catch

A little-known bank has caused a stir in the buy-to-let mortgage market after launching a deal with a 3.9 per cent interest rate.

The State Bank of India’s UK arm, SBI UK, is behind the market-leading rate, which is available only to buy-to-let investors.

Its two-year solution of 3.9 per cent is available to those purchasing a property with a loan-to-value ratio of 50 per cent. This means they will need a minimum deposit of 50 percent to be eligible.

Not only is this the lowest rate on the market, but it is well ahead of the market norm. According to Moneyfacts, the average for two fixed-rate buy-to-let mortgages is 6.48 per cent.

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 one major drawback which may mean the SBI UK deal is not the cheapest product for buy-to-let investors overall.

This is because it has a whopping 5 percent product fee. This can be added to the mortgage or paid up front.

This means that someone taking out a loan of £200,000 will be charged £10,000.

Offers that have much higher rates, but lower fees, may ultimately cost less overall.

For example, Virgin Money has a 4.87 per cent offer available for those purchasing with a 40 per cent deposit, which comes with a lower fee of £3,000.

Those who choose to add the fee to the mortgage will of course save on monthly payments by opting for the Bank of India deal. However, they are likely to 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 director at broker John Charcol, says: ‘This is an impact rate announcement from the State Bank of India. At first I wasn’t sure it was right. No other lender has broken the 4.5 percent barrier, let alone 4 percent.

‘Having spoken to the lender, it is not going to last long as they have a small tranche of funds for this deal and it is a very positive statement to put out in the market.

‘A two-year fixed rate of up to 50 per cent loan-to-value ratio at 3.90 per cent has become the best buy overnight.

‘The big problem with this agreement is that they charge high fees compared to competitors, ranging between 1 and 3 percent.

“When the 5 percent set-up fee is taken into account, this is in line with competitors at the top of best buys, although their fixed fees are almost 1 percent higher compared to the new ad of SBI rates”.

Should buy-to-let borrowers consider the SBI UK deal?

Whether or not property investors should consider it will depend on the overall cost and their personal circumstances. To establish this, they will probably need to speak to a mortgage broker.

You can also calculate how much your monthly payments would be using our mortgage calculator.

Talk to a broker – homeowners should seek advice on whether the mortgage is right for them

Some borrowers may also be wary of having a mortgage with a bank they may have never heard of, such as SBI UK, but given that it is a fully licensed 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 the fact that they haven’t been heard of before should not be discounted.

“We continually see new lenders coming to the market looking for ways to disrupt the mainstream, through different criteria or attractive rates.”