Buy to let mortgage rates may be falling – but the cost of loans is still expensive as lenders pile on fees.
Some lenders can push up the effective interest rate of a two-year fixed rate mortgage by 2% by loading charges like booking and arrangement fees on top of valuations and legal costs.
Lenders use the fees to make the headline interest rates look low while making the money back on charges.
They also separate cash-rich customers who can afford the high fees from those without ready access to cash.
For example, The Mortgage Works, Nationwide’s landlord mortgage arm, offers a 2.74% fixed rate for two years – plus a 3.5% arrangement fee, which on a property valued at £200,000 would be an extra £7,000 charge.
With valuation and legal fee on top the effective rate for the mortgage becomes 4.81%.
David Whittaker, managing director of Mortgages for Business, said: “By including fees we have produced figures that more accurately reflect the costs of taking on a buy-to-let mortgage without the distortions caused by the way lenders structure fees on products to meet marketing requirements.
“Lender arrangement fees vary enormously. Some products carry a flat fee but most have percentage fees which can be in excess of 3%. This can make headline rates extremely misleading.”
The additional charges and fees are made up of lender arrangement fees, valuation and legal costs. They added an average 0.66% to a mortgage in 2010, but this has fallen to 0.57% in today’s market.
Such extra costs have a bigger effect on shot-team deals. For two-year mortgages they added an average of 1.14% to annual costs in 2010, but this has now dropped to 0.85%.
The advice for buy-to-let landlords searching for a mortgage is not to consider the headline interest rate alone but to also take into account the additional charges and fees.
Buy-to-let mortgage rates have fallen recently with the average now 4.6%. Twelve months ago it was 5.04% and three years ago it was 5.77%, figures from comparison website Moneyfacts show.
Online buy-to-let mortgage specialist Landlord Centre offers a far lower flat fee that could help landlords keep costs down.
The three-year fixed-rate deal with exclusive rates from Skipton Building Society has an interest rate of 3.79% for up to 65% LTV and 4.19% for up to 75% LTV.
Both come with a fixed completion fee of £995, which could work out better than being charged a percentage, and have free valuation and free legal costs on remortgages.
