Many landlords face historically high arrangement fees in the current mortgage market. What’s increasing lender arrangement fees, and how can you find a more competitive mortgage product?
As landlords look to secure their next mortgage product, many find that lender arrangement fees are significantly higher than in recent years. Below, we discuss what these fees involve, why they’re currently so high, and how you can find a more competitive option.
What are lender arrangement fees?
A lender arrangement fee is a fee lenders charge when you secure a mortgage. Some lenders ask you to pay this upon completion of your application, but most allow you to add it to the full loan amount. If you choose this latter option, it’s important to note that you will pay interest on the arrangement fee amount.
Lender arrangement fees are either fixed or a percentage of your overall loan amount.
Why are mortgage lender arrangement fees so high?
To understand why lenders have increased their arrangement fees, we need to look back at the economic challenges the mortgage market has faced over the last few years.
Before Liz Truss’ disastrous mini-budget, a standard lender arrangement fee was around 2%. However, the economic fallout in September-October 2022 saw mortgage rate pricing peak to unprecedented levels. As brokers, our main challenge became lender stress tests.
How does stress testing work?
Also referred to as Rent to Interest (RTI) calculations, lenders ‘stress test’ your mortgage application during their affordability assessments. These checks help lenders ascertain whether the rental income from the property will cover the mortgage repayments and allow you extra funds to profit from your rental investment and cover any unexpected financial outgoings. Typically, buy to let lender stress tests will be:
- 145% against pay rate for Individual applicants
- 125% against pay rate for Limited Company borrowers
It’s worth noting that some lenders will stress test you at a higher rate than your chosen product. Furthermore, Limited Company borrowers benefit from more favourable stress testing as they pay corporation tax rather than income tax.
Why did lender stress tests push up arrangement fees?
As the money markets reacted to the mini-budget, SWAP rates increased significantly, in line with economic volatility. Mortgage lenders then pulled products with little to no notice and increased pricing. Consequently, for most landlords approaching their refinance options or looking at purchasing a new property investment, their rental income no longer met lender stress testing requirements.
To support landlords through this challenge and encourage new business, lenders took the innovative approach of charging a higher arrangement fee to price more competitively. Whilst this reduces lender profit margins on the cost of funds, the higher fees compensate for this, and as a result, more landlords achieve their borrowing requirements.
How can I find a more cost-effective option?
Whilst this has helped many clients, the upfront arrangement fee costs can deter many landlords. Working with our expert brokers, who can calculate the most cost-effective option for you, is essential. Whether this means taking a higher rate or paying a large arrangement fee, our experts can discuss the best route for your individual property finance plans.
To ask any questions about securing your next mortgage and how we can help, call 0345 345 6788 or submit an enquiry here.
