But why would you opt for a higher fee? Well, it could be the answer for landlords struggling to raise the amount they need to purchase or remortgage property due to having to meet the interest cover ratio (ICR).
With variable product interest rate and fee structures, borrowers have more options. By paying a higher fee, the mortgage rate will be lower and therefore more money can be borrowed.
This new structure has come about because the mortgage industry has had to adapt to a new world where interest rates are no longer at historic lows. Those days are well gone – at least for the foreseeable future.
A new interest rate environment
What we have seen is a rapid rise in mortgage pricing and that has been an issue for everyone from lenders and funders to brokers and of course borrowers. When the mini Budget of September 2022 proved unpopular with the financial markets, panic set in and mortgage rates rose sharply.
This has been of particular concern for landlords seeking buy-to-let finance where mortgages are stress tested with ICRs. Landlords can’t borrow as much as they could in the past because the interest rates are higher.
We had to try to find a way around this, so we redesigned our products using a variable interest rate and fee structure. By offering a range of rates with different fees, advisers and their landlord clients have various options and can borrow more money.
Example
The easiest way to explain this is with an example. A landlord requires a 65 per cent loan to value (LTV) mortgage and intends to charge £1,000 a month in rent, the ICR is 125 per cent. How much can be borrowed?
- Mortgage rate of 4.34 per cent with seven per cent fee = £221,198 maximum borrowing
- Mortgage rate of 4.74 per cent with five per cent fee = £202,531 maximum borrowing
- Mortgage rate of 5.34 per cent with two per cent fee = £179,775 maximum borrowing
By paying a seven per cent fee the landlord can secure a pay rate of 4.34 per cent and borrow over £41,000 more than opting for the product with the lower two per cent fee, which comes with a higher interest rate of 5.34 per cent.
Industry reaction
We understood we were taking a risk by creating a variable rate and fee structure. But actually, advisers have welcomed it because their main challenge was not being able to secure the borrowing amount their clients needed.
This is a way around that issue and intermediaries have told me they think it is innovative, while other buy-to-let lenders are now also offering variable rate and fee options.
Intermediaries may also wish to suggest to their landlord clients to talk to a tax adviser to see if this could be beneficial for their tax affairs.
As a specialist buy-to-let lender we strive to offer competitively priced mortgages with flexible criteria and options, working closely with our intermediary partners to help their landlord clients secure the most appropriate deal.
