Why are fees so high and how do we advise you on navigating them?

Mortgage rates are rising and fees are higher than ever, but that isn’t necessarily a bad thing, as director Matt Hardman explains below.

So, why are arrangement fees so high in the world of buy to let – and how do we advise you on navigating them?

Arrangement fees are higher than ever.  Up to 7% on specialist buy to let products.

However, this can be an advantage if you are looking for sizeable loans based on your rental income.

Let’s face it, you simply can’t borrow as much as you used to be able to do now that the Bank of England base rate is at 5.25%*, based on any given rental income.  This is because the rate you pay is often linked to the amount you can borrow.

And even if it isn’t, ICR (Interest Cover Ratio) rates are now more stringent than they’ve been in over 15 years.  So, borrowing power within Buy to Let is arguably at its poorest level ever.

Landlords are often frustrated by these fees, however they can also facilitate exactly what landlords need, a loan size that means they don’t have to inject significant capital to make a new mortgage these days, work for them.  Or forcing them to switch with their current lender to a more expensive deal than the market can offer, or even worse – a high standard variable rate.

Of course, we can allow a capital injection if it works for you and makes the mortgage scheme more digestible and we can advise you on certain options that give large arrangement fees a miss.  It’s just whatever works for you and the loan amount you require.

Borrowing amounts vary wildly based upon the product you are taking, i.e. whether it’s fixed or variable and for how long, the lender you are using and the type of property you are buying.  Indeed your personal income can assist in some scenarios.

And of course, our recommendations are based on what is cheapest over the benefit term accounting for all factors including your circumstance and lender criteria.  (Please note that there is no advice here below, just examples, because every situation and client is different)

The way we tend to advise is to look at the competitiveness of the mortgage as a whole, in other words if you’re looking at 5 year fixes, which many landlords currently are, we take the payments AND fees over the 5 years and work out which schemes are cheaper for exactly what you need.  

In other words, is it worth your while to pay the fees and make a saving overall because the rate is cheaper?  Or is it better to give the fees a miss and pay a slightly higher rate.

We have advanced mortgage software which does these calculations for us.

To give you one example based on current rates in terms of loan sizes for limited company borrowing over 5 years.

Let’s imagine, a property rent monthly of £2500.  It’s an SPV limited company. The required loan is £400,000.

In this fictitious scenario we have a choice between two real life schemes – one with a low £995 fee and one with a significant 5% fee, a sum equating to £20,000 in arrangement costs.

Or we have a higher rate with a low flat fee for example.

Ok this is one example, but there are many repeatable examples we see every day dependent upon loan and product.

In fact we have products which have lower rates which can generate more loan size, but with higher arrangement fees.

Option 2 doesn’t have a large arrangement fee, but payments are higher and the loan size is dented by the higher pay rate percentage, despite the significantly lower fee.

In actual fact the larger fee product is cheaper by around £3,000 over the term, due to the lower payments over 5 years, savings are made beyond the sizeable arrangement fee.

So, a landlord wishing to opt for the 2nd option, would have to inject capital of around £29,000 in order to make that option work, but yet still be paying more than in option 1 on a like for like loan size.

However, if you feel 2 year deals offer better value as rates may drop in future and you’d like to take advantage at that future point, then of course we can advise you in line with those requirements and risk profile.

Having said that, looking at 2 year fixed options would drop borrowing power even further against this £2500 rental size as ICR’s are again stricter.

A lot of our clients look at the fees and split them out over the term of the benefit period.  So a 5 year fixed rate of 5.35% with a 5% fee, becomes a rate of 6.35%.  We appreciate that the math doesn’t quite work out to a true formula if adding a 5% fee to the loan and interest being charged here, but it’s a good way of benchmarking one scheme against another or becoming more comfortable with larger fees by looking at costings in this way.

These are the types of advice conversations we are having with clients daily.  What works for one client, may not work for another.  Many of our clients have paid sizeable fees recently or historically because it worked for them, others don’t need to and don’t because they can save money by avoiding them, others have injected capital to reduce the balance and make things work that way.

And as we’ve illustrated here, sometimes it’s worth paying the extra fees to save on the rate to grab the most economical mortgage.

We have also refinanced other unencumbered property in the background portfolio to save capital injection and spread the debt across other properties to facilitate the borrowing required at times too.

It’s important to note that as a brokerage we are paid by our lenders at exactly the same rate whether the fees are big or small.  Our advice does not waver and is tailored to you as a client, whether you’re borrowing personally or through a company, whether it’s to refinance a HMO or buy a block of flats.

We see many scenarios daily that are similar, but none are exactly the same.  Mortgage schemes come and go, however the principles of how to structure a case mathematically, remain. 

Feel free to call us, explain your situation and we’ll listen and come up with a suitable plan for you to mull over, in line with your wishes.  It’s how we work and it’s why we are fantastically 5 star rated…see here.

You can also find out more about our team here.

Please note that none of the above constitutes advice for a particular situation, please call us for a bespoke quote and illustration.