Why are BTL Fees so high?

Why Are Buy-To-Let Mortgage Fees So High?

Buy-to-let mortgage fees can seem high because many lenders use arrangement fees to balance the interest rate, rental stress test and overall profitability of the product.

In some cases, a buy-to-let mortgage with a high product fee may have a lower interest rate. This can help reduce the monthly payment and, in some cases, improve the amount a landlord can borrow based on the rental income. However, a lower rate does not automatically mean the deal is cheaper overall.

The key is to compare the total cost of the mortgage, including the interest rate, product fee, valuation fee, legal costs, broker fee and whether the arrangement fee is paid upfront or added to the loan.

At Kerr & Watson, we help landlords compare buy-to-let products properly, rather than looking only at the headline interest rate.

What Are Buy-To-Let Mortgage Fees?

Buy-to-let mortgage fees usually include the lender’s arrangement or product fee, which is the fee charged for setting up the mortgage product. This may be a fixed fee, such as £999 or £1,999, or a percentage of the mortgage amount.

Percentage-based fees can look particularly expensive because they increase with the loan size. For example, a 3% fee on a £300,000 mortgage would be £9,000. A 5% fee on the same loan would be £15,000.

Some lenders allow the fee to be added to the mortgage, but this means you may pay interest on the fee unless it is repaid separately. Your adviser should compare whether paying the fee upfront or adding it to the loan is more suitable for your circumstances.

Types Of Buy-To-Let Mortgage Fees

Why Are BTL Fees So High?

Economic Factors

Market conditions can affect buy-to-let pricing. When funding costs, interest rate expectations or lender risk increase, this can feed into the way lenders price their products. Some lenders may offer lower-fee or no-fee options, but these often come with higher interest rates.

A mortgage adviser can compare the total cost of the options available, including the rate, fee, rental stress test and whether the fee is paid upfront or added to the loan.

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.

Why Do Some Buy-To-Let Mortgages Have A High Fee And Lower Rate?

Some buy-to-let mortgage products have a high arrangement fee because the lender is offering a lower interest rate. This can make the monthly payment look more attractive, but the fee still needs to be included in the overall cost.

For landlords, this can be important because buy-to-let affordability is often based on rental income. A lower interest rate may help the rent pass the lender’s stress test, which could allow a higher loan amount than a product with a higher interest rate and lower fee.

However, this does not mean the high-fee product is always better. If the fee is large, especially on a short fixed-rate period, it may outweigh the monthly saving. The right answer depends on the loan size, interest rate, product fee, fixed period, rental income and whether the fee is paid upfront or added to the mortgage.

How Does Rental Stress Testing Affect BTL Fees?

Buy-to-let lenders usually assess the mortgage against the expected rental income from the property. This is often called the rental stress test.

The lender wants to see that the rent is high enough to cover the mortgage payment, often using a stressed interest rate rather than just the actual product rate. This is designed to check whether the mortgage still looks affordable if interest rates rise or if the landlord has additional costs.

This is one reason high-fee, lower-rate products can appear in the market. A lower product rate may help the rental calculation work, even though the arrangement fee is higher. For some landlords, this can make the difference between the required loan amount being possible or not.

Example Of How A High Buy-To-Let Fee Can Affect Borrowing

A landlord needs a £300,000 buy-to-let mortgage.

If the product has a 5% arrangement fee and the lender deducts the fee from the gross loan, the fee would be £15,000. This could mean the net amount available to the landlord is £285,000.

That £15,000 difference could be important if the landlord needs the full amount to complete the purchase or refinance.

However, another product with no fee may have a higher interest rate. If the higher rate means the rent no longer passes the lender’s stress test, the maximum loan available could be lower.

This is why the cheapest-looking product is not always the best option. The adviser needs to compare the interest rate, fee, stress test, net loan available and total cost over the fixed period.

Should You Add A Buy-To-Let Fee To The Mortgage?

Some lenders allow the arrangement fee to be added to the mortgage. This can reduce the upfront cash needed, but it usually means paying interest on the fee while it remains part of the mortgage balance.

For example, if a £10,000 fee is added to the loan, the landlord may not need to pay that fee upfront, but the mortgage balance will be higher. This can increase the total interest paid and may also affect the loan-to-value or affordability calculation.

Whether this is sensible depends on the product, cash flow, tax position, loan size and how long the mortgage is likely to be kept. It should be compared properly before a decision is made.

Are Fees Higher For Limited Company, HMO Or Specialist BTL Mortgages?

Fees can be higher on more specialist buy-to-let products. This may include limited company buy-to-let, HMOs, multi-unit blocks, holiday lets, expat landlords, portfolio landlords or more complex property types.

These cases can involve more underwriting, higher perceived risk or fewer lenders in the market. As a result, the product fee, interest rate or both may be higher than a straightforward personal-name buy-to-let mortgage.

That does not mean these products should be avoided. It means the total cost and lender criteria need to be reviewed carefully.

Finding The Right Buy-To-Let Mortgage Option

The right buy-to-let mortgage is not always the one with the lowest interest rate or the lowest fee. It depends on the loan amount, rental income, property type, tax position, cash flow and how long you expect to keep the mortgage.

Some landlords may prefer a lower monthly payment, even if this means accepting a higher product fee. Others may prefer a higher rate with a lower fee if the overall cost is lower over the fixed period.

At Kerr & Watson, we compare the full cost of the mortgage, including the rate, fee, rental stress test and lender criteria, so you can make a more informed decision.

Frequently Asked Questions About Buy-To-Let Mortgage Fees

Why are buy-to-let mortgage fees so high?

Buy-to-let mortgage fees can be high because lenders often use fees to balance the interest rate, rental stress test, loan size and profitability of the product. A high-fee product may sometimes come with a lower interest rate.

Are high-fee buy-to-let mortgages always bad?

Not always. A high fee may be worthwhile if the lower interest rate reduces the monthly payment, improves rental stress testing or makes the total cost cheaper over the fixed period. However, this needs to be calculated carefully.

Is it better to choose a lower rate with a higher fee?

It depends on the loan amount, fee, interest rate, fixed period and whether the fee is paid upfront or added to the mortgage. A lower rate with a high fee is not automatically cheaper.

Can BTL arrangement fees be added to the mortgage?

Some lenders allow arrangement fees to be added to the mortgage, but this can increase the loan balance and may mean paying interest on the fee.

Do BTL fees affect how much I can borrow?

Yes, they can. If the lender deducts the fee from the gross loan, the net loan available may be lower. The product rate can also affect the rental stress test and therefore the maximum borrowing.

Are limited company BTL fees higher?

They can be. Limited company, HMO, multi-unit, holiday let, expat and portfolio landlord products may have higher fees or different pricing because they are more specialist.

Should I pay the BTL fee upfront or add it to the loan?

This depends on your cash position, tax position, interest rate, loan size and long-term plans. Paying upfront may reduce the mortgage balance, while adding the fee can preserve cash but may increase the total interest paid.

Conclusion

Buy-to-let mortgage fees can feel high, especially where the lender charges a percentage of the loan amount rather than a fixed fee.

However, the fee should not be looked at in isolation. Some higher-fee products come with lower interest rates, which may reduce the monthly payment, improve the rental stress test or make the overall cost more competitive over the fixed period.

The right product will depend on the loan size, rent, property type, lender criteria, tax position, cash flow and whether the fee is paid upfront or added to the mortgage.

At Kerr & Watson, we help landlords compare the full cost of buy-to-let mortgage options, rather than focusing only on the headline interest rate.

Speak to Kerr & Watson if you would like to review your buy-to-let mortgage options.