Unmasking the True Cost of Buy-to-Let Mortgage Fees

Buy-to-let lenders are cashing in on high mortgage interest rates, charging landlords huge back-door arrangement fees.

A survey of buy-to-let mortgages shows most lenders are adding to their profits with fees.

Charging a fee makes the loan look cheaper but costs a landlord thousands.

Arrangement fees are the cost a lender puts on setting up a loan.

Take The Mortgage Works 6.29 per cent two-year fixed deal, which is already one per cent more expensive than many buy-to-let offers.

Who charges the cheapest fees?

Using a £150,000  loan as an example, at 6.29 per cent, an interest-only mortgage over two years is £18,870 plus a 3 per cent arrangement fee of £4,500 costs £23,370.

So, how much can property investors expect to pay in arrangement fees to a buy-to-let lender?

The Guild of Landlords surveyed the market in August 2023; these are the results from 20 lenders.

Landbay and LendInvest add the most expensive fees - 7 per cent of the advance, while The Mortgage Works and the Post Office are the cheapest, with some deals with a fixed price of £1,495.

Buy-to-let mortgage fees

Charging a hefty arrangement fee can distort the price of a mortgage by making the interest rate seemingly cheaper.

For example, to cost The Mortgage Works 6.29% fixed over two years, borrowers must calculate the interest charged and then add other costs., like booking fees or surveys.

For instance, for a borrowing of £150,000 over two years, the interest comes to £18,870, or £786.25 a month. With the arrangement fee included, this rises to a borrowing cost of £23,370  or £973.75 monthly.

What other fees do lenders charge?

Fees for mortgages vary between lenders.

Typically, lenders charge application fees, such as a booking fee, valuation and legal costs.

Once the loan is completed, other fees come into play, like the arrangement fee, early repayment charge or exit fee.

Borrowers pay the arrangement fee on completion of the loan, while the other fees are due if the loan ends early for some reason.

Why pick a two-year fix?

Two-year fixes are popular with landlords as the loans often attract the lowest interest rates and offer a chance of remortgaging to a better rate in the short term.

However, sometimes, fixed rates are more expensive than tracker buy-to-let mortgages.

How much can a landlord borrow?

How much a landlord can borrow depends on many factors, like the property value and the rent tenants pay. Generally, buy-to-let mortgages range between a loan-to-value of 60 to 80 per cent of the property value.

Are buy-to-let loans regulated?

Most buy-to-let mortgages are unregulated - but the status depends on each landlord's circumstances. Mortgages are regulated or called family mortgages when the landlord has a family connection to the renters. Lenders underwrite these arrangements like homeowner loans.

Adding the arrangement fee to the loan

Adding the arrangement fee to the loan is not a good idea because this increases the borrowing and is more expensive as lenders charge interest on the fee and the loan.