Buy-to-letFeb 2 2023

Lenders hike fees to ‘keep BTL profit machine churning’

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Lenders hike fees to ‘keep BTL profit machine churning’
Photo by Dinendra Haria/Anadolu Agency via Getty ImagesAn aerial view of terraced houses in north London, Britain on December 20, 2022.

Lenders have been steadily increasing the arrangement fees charged on buy-to-let mortgages in recent weeks, with brokers suggesting it is in an attempt to maintain profit levels and allow landlords to borrow more.

An arrangement fee - sometimes called a booking or completion fee - is charged by lenders on a mortgage for arranging the credit.

Mortgage brokers have said they have noticed a shift away from a flat fee model to a percentage based one, with some lenders charging as much as 5 and 7 per cent.

It's ludicrous and stinks of profiteering — Craig Fish, Lodestone Mortgages & Protection

According to the latest Nationwide house price index, the average UK house price in January 2023 sat at £258,297. On a mortgage with a loan-to-value of 60 per cent and an arrangement fee of 5 per cent, landlords are looking at a fee of more than £7,700.

Brokers have said that up until recently, a typical flat fee of around £999 - £1,500 would be charged on a buy-to-let mortgage, but as a result of rising interest rates a lot of lenders have moved to a percentage based model instead.

“To keep [interest] rates lower, lenders are front loading with hefty booking fees,” broker and owner of Riverside Mortgages, Lewis Shaw explained.

“Where a £200,000 mortgage may have come with a £995 fee 12 months ago, that could very easily now be up to £3,000 or more in some circumstances. 

“The rationale is that if lenders can make a profit upfront, they can move rates lower and keep the profit machine that is buy-to-let churning,” he said.

According to Scott Taylor-Barr, a financial adviser at Carl Summers Financial Services, when it comes to pricing products, lenders have very few levers they can pull. 

“The only two that have any significant impact are the rate and the fees. In periods of higher rates, we tend to find fees increase, as lenders try to maintain their profitability without increasing interest rates,” Taylor-Barr told FTAdviser. 

He added that in terms of buy-to-let, increasing the arrangement fee as opposed to the interest rate means it also allows lenders to maintain their business volumes.

This is because increasing interest rates would result in more applicants failing at the point of stress testing, whereas increasing arrangement fees has no impact on stress testing.

“So it is better for borrowers and the lender to increase the fee in that scenario than the rate,” Taylor-Barr said.

It's business and for a lot of landlords, it works  Austyn Johnson, Mortgage for Actors

Some brokers have predicted that despite interest rates trending down in recent months, higher percentage based arrangement fees may continue.