Brokers delve into the issue
The impact last autumn’s mini budget had on swap rates is still reverberating throughout the market, with high product fees on buy-to-let mortgages still in place.
However, are they still necessary? Brokers shared their views with Mortgage Introducer.
The new wild west
Kundan Bhaduri (pictured left), property developer and portfolio landlord at The Kushman Group, said the recent surge in ‘eye-gouging fees’ imposed by buy-to-let lenders was punishing landlords.
“This trend has been going on since the Liz Truss era, with fees being cranked up to disproportionate levels to make deals look more attractive,” he said.
These “extreme” product fees, Bhaduri added, had not only sent shockwaves throughout the landlord community, but had also ignited debates regarding the intentions of most buy-to-let lenders.
Bhaduri believed that while some argued that the fees were a strategic way to maintain lower interest rates and enhance affordability, it was becoming increasingly evident that they bordered on profiteering.
“Lenders used to charge around £995 to 2% in arrangement fees, but they are now not far off £50,000 in some cases,” he said.
The impact, Bhaduri said, was too much, and he believed it was vital the government stepsped in to regulate and clamp down on the practice.
“Transparent fee structures and fair competition should be the bedrock of the buy-to-let mortgage market - but right now, it is the wild west,” he stated.
Amit Patel (pictured right), adviser at Trinity Finance, said ‘daylight robbery’ were the words of one client when he told them that, for the affordability to fit, they would have to pay a 7% arrangement fee.
Patel added that a 7% arrangement fee on a mortgage of £350,000 equated to £24,500, which he believed was a serious dilemma for any landlord.
“You can either pay it upfront or add it to the mortgage, but if you add £24,500 to the principal then this will cause an issue when it comes to re-financing in the future; it is double jeopardy and landlords have a limited choice, namely take it or leave it,” he said.
An advance interest rate
Justin Moy, managing director at EHF Mortgages, said arrangement fees on buy-to-let mortgages had become ‘brutal since the mini budget’, also pointing to some as high as 7%. He added that not only was the fee often staggeringly high, but thousands in extra interest was then charged, too, as the fee was typically added to the loan; on short-term deals, he said the fee was also difficult to justify even with a lower rate.
“What is important to look at is the overall cost, so the relationship between rate, fee and the other costs associated with the product,” he said.
For example, Moy said a lender may have three options; a five-year fixed deal at 7% with no product fee, 6% fixed with a 3% fee, or 5% with a 5% fee.
Depending on the amount borrowed, he said one of those deals would be the cheapest for the client, but, for many, the landlord would be able to borrow more on the 5% rate and 5% fee combination, as the affordability would be based on that lower rate.
“No-one likes the high fees, but that lower rate and payment each month may be crucial for landlords to make the numbers work,” Moy said.
Bob Singh, founder at Chess Mortgages, agreed with Moy that due to stricter ICR calculations, lenders have had to invent ways to carry on lending, yet still remain within the realms of responsible lending.
“Larger fees have been a necessity to deal with higher stress tests requirements; I call it advance interest as it is taken at the front end but the overall payments over, say a five-year period, are broadly similar to a lender who charges a higher rate and a lower fee,” he said.
Singh added that most of the clients he has encountered understood the concept if explained in this manner.
James Miles, director and mortgage adviser at The Mortgage Quarter, added that whether you liked it or not, higher arrangement fees were the only instrument lenders had to ensure borrowing could still continue for the benefit of the landlord, while also satisfying their stress tests with the regulator.
“However, just because you can does not mean you should; many landlords are being put off with the higher fee and putting their buying plans on hold or diversifying into multi-room lets, which is clearly not suitable for many, especially families,” he added.
Do you believe product rates on buy-to-let mortgages are too high? Let us know in the comment section below.
