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Landlords accuse lenders of 'daylight robbery' on buy-to-let arrangement fees

Journalist: Justin Moy, Contributing Editor

ended 13. August 2023

Last autumn's mini-Budget, and its subsequent impact on SWAP rates, saw the introduction of staggeringly high product fees on buy-to-let mortgages.

One landlord has described the fees as daylight robbery, while another said the fees “border on profiteering, as they are causing extreme financial distress to landlords.”

Brokers noted the trend but most believe lenders are acting out of necessity to enable landlords to achieve affordability.

Justin Moy, founder at Chelmsford-based mortgage broker, EHF Mortgages, said: “Arrangement fees on buy-to-let mortgages have become brutal since the mini-Budget, with some as high as 7% of the mortgage amount. Not only is the fee often staggeringly high, but thousands in extra interest is then charged, too, as the fee is typically added to the loan. No one likes the high fees, but that lower rate and payment each month may be crucial for landlords to make the numbers work.”

James Miles, director of Exeter-based broker, The Mortgage Quarter, mirrored Moy's views: “Whether you like it or not, higher arrangement fees are the only instrument lenders have to ensure borrowing can still continue for the benefit of the landlord but also satisfy their stress tests with the regulator.”

But portfolio landlord, Kundan Bhaduri, director of London-based The Kushman Group, accused lenders of profiteering and urged the Government to step in: “While some argue that these fees are a strategic way to maintain lower interest rates and enhance affordability, it is becoming increasingly evident that they border on profiteering, as they are causing extreme financial distress to landlords. Lenders used to charge around £995 to 2% in arrangement fees, but they're now not far off £50,000 in some cases."

He added: "It's vital that the Government steps in to regulate and curb these exploitative fees. Transparent fee structures and fair competition should be the bedrock of the buy-to-let mortgage market, because right now it's the Wild West.”

A client of Amit Patel, adviser at Welling-based mortgage broker, Trinity Finance, was on the same page as Bhaduri: “Daylight robbery were the words of one client when I told him that, for the affordability to fit, he would have to pay a 7% arrangement fee. A 7% arrangement fee on a mortgage of £350,000 equates to £24,500 and this is a serious dilemma for any landlord.”

Another broker, Elliott Culley, director at Hayling Island-based Switch Mortgage Finance, is concerned that the current level of arrangement fees will drive more landlords out of the market: “Something needs to change because landlords are struggling to make any profit and now they are being told to pay high fees to gain access to lower rates. More landlords will sell up, which will pile further pressure on the rental market.”

Riz Malik, director of Southend-on-Sea-based independent mortgage broker, R3 Mortgages, urged landlords to adapt to the new market conditions, which have changed considerably since this time last year:

"Some buy-to-let arrangement fees in the market could make your eyes water. Yet, for those landlords aiming for a certain loan size, choices might be limited without lower interest rates, and to achieve those lenders are now having to charge bigger fees. A drop in rates will often expand options for landlords and, for now, the way high arrangement fees are helping improve affordability seems like the status quo. Many landlords are adjusting to today's buy-to-let market landscape, a shift from what they once knew of low rates and low fees. We're not in Kansas anymore.”

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8 responses from the Newspage community

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Editor
Justin MoyVerified
Managing Director at EHF Mortgages
Arrangement fees on buy-to-let mortgages have become brutal since the mini-Budget, with some as high as 7% of the mortgage amount. Not only is the fee often staggeringly high, but thousands in extra interest is then charged, too, as the fee is typically added to the loan. And on short-term deals, the fee is really difficult to justify even with a lower rate. What's important to look at is the overall cost, so the relationship between rate, fee and the other costs associated with the product. For example, a lender may have three options: a 5yr 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, one of those deals will be the cheapest for the client, but for many, the landlord will be able to borrow more on the 5% rate and 5% fee combination, as the affordability will 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.
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Bob SinghVerified
Founder at Chess Mortgages
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’s taken at the front end but the overall payments over, say a 5-year period are broadly similar to a lender who charges a higher rate and a lower fee. Most clients understand the concept if explained in this manner. Lenders have yet to become fully commercial about this as other revenue streams within a client's portfolio are sometimes not taken into account and propositions are assessed on a standalone basis. Top slicing needs to adopted by more lenders. The situation could have been much worse had it not been for rising rents, which have eased ICR calculations. As many clients will have to take 5-year fixed rate to obtain maximum lending, it may mean they pay over the odds when rates drop. A no-ERC deal will be best for many.
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Editor
Riz MalikVerified
Independent Financial Adviser at R3 Wealth
Some buy-to-let arrangement fees in the market could make your eyes water. Yet, for those landlords aiming for a certain loan size, choices might be limited without lower interest rates, and to achieve those lenders are now having to charge bigger fees. A drop in rates will often expand options for landlords and, for now, the way high arrangement fees are helping improve affordability seems like the status quo. Many landlords are adjusting to today's buy-to-let market landscape, a shift from what they once knew of low rates and low fees. We're not in Kansas anymore.
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Elliott CulleyVerified
Director at Switch Mortgage Finance
The fees on buy-to-let mortgages have become astronomical with some charging up to 7% of the loan size to have access to a better rate. The argument will be this is the only way to keep lending affordable in the current market given the way rental payments are stress-tested. Even with lower rates, it's very difficult to make cases fit affordability right now as some clients don't have the money to pay for these fees, and if they want to add it to the loan, this needs to be factored into the affordability. Something needs to change because landlords are struggling to make any profit and now they are being told to pay high fees to gain access to lower rates. More landlords will sell up, which will pile further pressure on the rental market.
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Kundan BhaduriVerified
Property Developer and Portfolio Landlord at The Kushman Group
The recent surge in eye-gouging fees imposed by buy-to-let lenders is punishing landlords. This trend has been going on since the Truss era, with fees being cranked up to disproportionate levels to make deals look more attractive. These extreme product fees have not only sent shockwaves throughout the landlord community but have also ignited debates regarding the intentions of most buy-to-let lenders. While some argue that these fees are a strategic way to maintain lower interest rates and enhance affordability, it is becoming increasingly evident that they border on profiteering, as they are causing extreme financial distress to portfolio landlords. Lenders used to charge around £995 to 2% in arrangement fees, but they're now not far off £50,000 in some cases. It's vital that the Government steps in to regulate and curb these exploitative fees. Transparent fee structures and fair competition should be the bedrock of the buy-to-let mortgage market, because right now it's the Wild West.
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Anil MistryVerified
Director and Mortgage Broker at RNR Mortgage Solutions
Lenders have significantly increased fees, resulting in lower interest rates for borrowers. This enhances the likelihood of meeting lenders' ICR criteria and securing the required loan. However, some lenders correlate lower fees with higher ICR thresholds, potentially rendering certain mortgages unattainable. This doesn't necessarily constitute a profit-driven strategy. Brokers carefully consider the fee's value over the product term. In specific cases, meeting the mandated ICR may necessitate the fee payment for mortgage eligibility.
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Amit PatelVerified
Adviser at Trinity Finance
'Daylight robbery' were the words of one client when I told him that, for the affordability to fit, he would have to pay a 7% arrangement fee. A 7% arrangement fee on a mortgage of £350,000 equates to £24,500 and this is a serious dilemma for any landlord. Either pay it upfront or add to the mortgage. If you add £24,500 to the principal then this will cause an issue when it comes to re-financing in future. It's double jeopardy and landlords have a limited choice, namely take it or leave it.
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James Miles0
Director - Mortgage Adviser at The Mortgage Quarter
Whether you like it or not, higher arrangement fees are the only instrument lenders have to ensure borrowing can still continue for the benefit of the landlord but also satisfy their stress tests with the regulator. However, just because you can doesn't 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.