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4 Jul 2020


Buy-to-let: When is a high fee too high a fee?

Buy-to-let landlords looking for low priced mortgage deals should beware the potential pitfalls of low interest rate products, which have hefty fees and charges alongside. More and more lenders in the sector are launching products marketed as ‘low rate/high fee’ in a bid to attract new custom. But when does a high fee become too high?

Alan Harper, Senior Analyst at eMoneyfacts.co.uk, says: “The idea of lenders offering the choice between products that offer comparatively high interest rates with low fees, and low interest rates with high fees, has been around for a year or two now. Individual circumstances will determine which is the better option in any specific case, but it’s worth bearing in mind the effect a large fee can have over the term of the deal on the overall cost of the mortgage.

“Take Abbey for example. It has recently launched two and three fixed rate deals of 5.19% or 5.29% respectively with a booking fee of £3,999 – the largest flat fee yet seen in the buy-to-let sector. Neither of these products offer clients any incentives on valuation or legal fees, so by the time these are taken into account, total fees payable could approach £5,000.

“Using the Abbey three-year rate above as an example, a £300,000 mortgage on a property valued at £400,000, and including the £3,999 booking fee, valuation fee of £340, non-refundable survey set-up fee of £90 and assumed legal fees of £250, equates to a true cost (on an interest-only basis) in the first three years of £52,289.

“By way of a hypothetical comparison, if the £3,999 booking fee is stripped out of the equation, the initial product rate would need to rise to a much less attractive sounding 5.73%, nearly 50 basis points higher, before the three-year true cost would reach the same figure.

“Abbey is not alone. Standard Life Bank’s buy-to-let three-year fixed deals go one stage further. On its ‘Normal Fee’ range, applicants must pay a booking fee of £499 and an arrangement fee, also of £499, but for multiple applications of up to ten properties only one further arrangement fee of £299 is charged. However, on its new ‘High Fee’ three year fixed products (headline rates are 0.22% lower), not only does the booking fee rise to £1,300 but both this and the full £499 arrangement fee must be paid in full on each individual application. So an landlord mortgaging the maximum ten properties allowed by Standard Life Bank would be charged total product fees (arrangement and booking) of £1,297 on the ‘Normal Fee’ range, but a massive £17,990 on the ‘High Fee’ range.

“Other lenders, such as Northern Rock, have gone along a different tack by tiering percentage fees (rather than flat amounts). In their case the fees are between 0.75% and 2.50% dependent on the product rate: it also offers a fee-free version as well.

“So whilst getting a low rate deal may appear an attractive option, it does come at a price – and it’s a price that’s increasing all the time. Whatever the scenario, consumers should seek guidance from a qualified independent adviser before taking on a commitment of this kind.”

Moneyfacts Group
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry. 

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