Buy-to-let lenders absorb costs to keep rates low

Buy-to-let lenders absorb costs to keep rates low

Lenders are absorbing more costs to keep their buy-to-let rates competitive, according to data.

Buy-to-let (BTL) lending margins were squeezed in the last quarter of 2017, according the latest results of the BTL Mortgage Costs Index.

The analysis, which was published by Mortgages for Business, revealed the underlying cost of funds to lend rose in Q4 2017.

In particular, swap rates remained elevated, coinciding with the increase in the base rate of interest by the Bank of England in November.

By the end of the year, two-, three- and five-year swaps, on which fixed-rate mortgages are typically based, were higher than at the start of 2017. 

BTL lenders, whose margins have been diminishing since July 2016, chose not to pass on the increases to borrowers. Instead, it seems they opted to squash their margins further, as they vyed for customers in light of fast-approaching year-end lending targets.

The data revealed that, between the beginning and the end of 2017, average lender margins over swaps had declined by 0.4 per cent points.

Steve Olejnik, chief operating officer of Mortgages for Business, said: "I doubt that lenders will consider lowering rates again. If anything, I would expect them to find ways of making up for the lost margins, particularly given that overall BTL lending looks set to dip this year."

The index also revealed that the effect of fees remained largely unchanged quarter on quarter, adding an average of 0.58 per cent to the headline rate advertised to borrowers – the lowest amount since the beginning of 2013 when the index started tracking this data.

Fees include lender arrangement fees, valuation fees and legal costs.

To meet targets, lenders increased the number of BTL mortgage products without arrangement fees to the detriment of products with fees calculated as a percentage of the loan amount.

Fee-free products accounted for 16 per cent of the market in Q4, up from 14 per cent in Q3 and the proportion of products with percentage-based fees dropped from 44 per cent in Q3 to 42 per cent in Q4.

At 42 per cent, the proportion of products with a flat fee structure remained the same, although the average fee charged by lenders rose by £53 to £1,423.

Carl Shave, director at Suffolk-based Just Mortgage Brokers, said: "With the BTL market in decline - reportedly net investment in the industry down 80 per cent in 2017 from 2015 figures - lenders are squeezing their margins to continue to offer attractive rates and compete for their piece of the shrinking pie.

"Margins are also being sacrificed in an effort to tempt would be remortgagers in a year when an expected spike in business is due following the surge in buy to let business written in 2016.

"Whilst the appetite remains, lenders will look to take the hit on their margins in an effort to continue to write the business. As swap rates remain high this is unlikely to continue.