Lenders hike fees to ‘keep BTL profit machine churning’

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.

During the course of January, mortgage interest rates continued to fall - with many brokers anticipating 4 per cent two and five-year deals in just a matter of weeks.

Harmony Financial Services director, Imran Hussain took the view that percentage based arrangement fees will be here to stay for a while, “especially if lenders look to make a profit on their buy-to-let business whilst remaining competitive rate wise”.

Brokers split on impact

In terms of what this actually means for borrowers, brokers have been split on the impact.

In practice most lenders have been charging around 3 per cent, but rates as steep as 7 per cent have also hit the market.

“On a £250,000 mortgage, paying close to £20,000 of your money is galling until you realise the rates are substantially lower,” David Conway, director at Clayhall Financial Services said.

He explained: “Paying 4.5 per cent with a 7 per cent fee on a five-year fixed rate is cheaper than paying 6 per cent with no fee. 

“The real benefit to landlord clients is these lower rates allow them to borrow more and/or avoid having to drain cash reserves to reduce the balance since the stress rate is based on pay rate. 

“This is a well thought out model for landlords facing a cashflow squeeze and brokers able to see the benefit of these for their clients.”

Likewise, Mortgage for Actors founder, Austyn Johnson said 7 per cent arrangement fees “actually are not that bad”.

“When you work out over the fixed term, they often work out cheaper due to the lower rate.

“Lenders are trying to help landlords with lower rates, but they also need to think of their own bottom line. Where will they make their money if the rate is too low? On the fees. 

“It's business and for a lot of landlords, it works,” Johnson said.

Model Financial Solutions director, Hannah Bashford took the view that “if you want one of the rates in the low 4 per cent you are going to pay a fee for it.”

“This is how lenders can reduce their fixed rates so aggressively, however, this is not across the board as there are a few discounted rates that have fees as low as £199,” Bashford said, but she noted that she is seeing a rise of percentage based fees.

Others in the industry have described the increase as profiteering from lenders. 

R3 Mortgages director, Riz Malik said the maths has not worked on any of the deals he has looked at so far for clients with the new higher fees.

“Many clients are now looking at a two-year time horizon rather than a five-year time horizon because they expect interest rates to fall in the future. However, the arrangement fees for two and five-year deals are very similar. 

“A 2 per cent arrangement fee spread out over 24 months could be equivalent to a few months' rent or even more. Market stability and market forces, hopefully, will increase competition in this field. However, most landlords will be forced to pass on increased costs to the tenants,” Malik said.

Lodestone Mortgages & Protection founder, Craig Fish told FTAdviser that a shift has been visible recently in landlords moving from personal buy-to-let investments to limited liability companies instead, partially due to better affordability calculations.

“But it seems that the lenders are also sensing this shift and increasing their fees, and in some cases substantially.

“It's ludicrous and stinks of profiteering. I'm not sure how this excessive charging structure will fit in with new consumer duty regulations, but I suspect that the lenders will continue to 'make hay while the sun shines’,” Fish said.

jane.matthews@ft.com