Why are BTL Fees so high?

Understanding Buy-to-Let Mortgage Fees

Buy-to-Let (BTL) investments have become increasingly popular, but many landlords find themselves puzzled by the perceived high fees associated with these mortgages.

Understanding the reasons behind these costs can help you make informed decisions.

At Kerr & Watson, we provide expert advice to help you navigate the complexities of BTL fees and find the best mortgage deals tailored to your needs.

What Are BTL Fees?

This is a question we hear a lot. BTL fees, commonly referred to as arrangement or booking fees, are charges imposed by lenders for setting up a mortgage.

These fees can be a fixed amount or a percentage of the loan value and are often a significant upfront cost.

They can sometimes be added to the loan, but this will incur additional interest charges due to paying interest on both the net loan and the fee added on. Your mortgage adviser will be able to assess this and make a recommendation tailored to you.

Types of BTL Fees

Arrangement Fees: Fees charged by the lender for setting up the mortgage.

Valuation Fees: Costs associated with assessing the property’s value.

Broker Fees: Fees for services provided by a mortgage broker.

Legal Fees: Costs for legal work involved in the property purchase.

Why Are BTL Fees So High?

Economic Factors

The economic landscape significantly influences BTL fees. Recent market volatility, such as that following economic policy changes, has led to increased costs for lenders. These costs are often passed on to borrowers through higher fees. It can be possible to get lower fees, and sometimes no arrangement fee at all, but this usually results in higher interest rates.

A mortgage adviser would work out what is cheapest overall and recommend accordingly. Some borrowers prefer more cash flow and are willing to pay a premium for this. Professional advice should be taken as everyone’s situation is different.

Increased Stress Testing

Lenders conduct rigorous stress testing to ensure that borrowers can meet their mortgage payments even if interest rates rise. This includes assessing the property’s rental income against the mortgage repayments.

The need for thorough testing, especially after market disruptions, has led lenders to increase arrangement fees to maintain profitability while offering competitive rates.

Shift from Fixed to Percentage-Based Fees

In the past, BTL arrangement fees were typically fixed amounts. However, many lenders have shifted to percentage-based fees, sometimes as high as 5-7% of the loan amount which can be very costly.

This shift allows lenders to adjust fees based on the loan size, which can help them remain competitive in terms of interest rates while still maintaining their profit margins.

If a high fee allows lenders to offer a lower rate on the product, that may allow the borrower to obtain a larger mortgage based on the rental income of the property.

Profitability Concerns

Lenders face pressure to maintain profitability amidst fluctuating interest rates and economic uncertainty.

By charging higher arrangement fees, lenders can offer lower interest rates while still ensuring a stable income stream.

This approach can also help them mitigate the risk associated with lower-rate products, especially in a volatile market and benefit the borrower to in terms of cashflow and loan potential.

How High Fees Impact Borrowing

Reduced Borrowing Power

Higher fees can reduce the amount you are able to borrow compared to a lower fee at on a product with the same rate of interest. For instance, a higher arrangement fee can decrease your maximum loan amount because the fee may be deducted from the overall loan value with the lender stating the maximum loan as the net loan.

For instance, if the rent amount meant that a maximum mortgage was gross £300,000 but the product had a 5% arrangement fee on it, the maximum new loan would be £285,000. This is £15,000 that the borrower may not be able to find if there is not a lender offering more.

Switching to a product with no arrangement fee would likely result in a higher loan, so that may mean the maximum potential is lower, for instance £270,000.

This all depends on the lenders and products so professional advice should be taken.

Cost-Benefit Analysis

Landlords must carefully consider whether paying a high arrangement fee for a lower interest rate is financially beneficial.

For example, a lower rate with a high fee may still be cheaper over the long term compared to a higher rate with a lower fee.

This requires a thorough analysis of the total cost of the mortgage over its term, including both fees and interest payments. Your mortgage adviser can assess this for you so you can make a decision.

Finding the Best BTL Mortgage Options

Working with a Specialist Broker

BTL mortgages can be daunting. A specialist broker, like Kerr & Watson, can provide invaluable assistance.

We have access to a wide range of lenders and products, including exclusive deals that may not be available to the general public by going direct.

Our expertise allows us to find the most cost-effective solutions, whether that involves a higher fee with a lower rate or a more balanced approach. The outcome is different for all borrowers so having a professional calculate this for you is recommended.

Tailored Advice for Different Scenarios

Every landlord’s situation is unique. Whether you’re looking for a two-year deal due to expectations of falling interest rates, or a five-year fix for stability, our tailored advice ensures you get the best deal for your specific needs. We also consider factors like rental income, property type, and personal financial circumstances that may determine the right product for you (for instance, intentions to sell in the future).

Exploring Alternatives

For those deterred by high fees, there are alternative options. For instance, some lenders offer products with lower or even no arrangement fees, albeit with higher interest rates. Additionally, leveraging existing equity or exploring limited company structures for BTL investments can provide more favourable terms for the right investors. Professional tax advice should be taken to understand all implications.

Conclusion

Understanding why BTL fees seem high is important for making informed investment decisions. These fees, while seemingly burdensome, are often a reflection of the broader economic environment , lenders’ need to manage risk and an alternative to other products with lower fees but higher rates (that are potentially even more expensive over the fixed period).

At Kerr & Watson, we specialise in helping landlords find the best possible mortgage solutions.

Contact us today to explore your BTL mortgage options and get expert advice tailored to your investment goals.