Research from specialist broker Mortgages for Business highlights the fact that the headline rates charged on buy-to-let mortgages, which have been falling in recent months, can be misleading, and urges landlords to look at the bigger picture.
The research reveals that average annual fees peaked in 2010, when they added 0.66% to the average annual cost of buying-to-let – this figure has since fallen to 0.57%.
However, the impact of fees varies widely from deal to deal, with the most expensive falling on the shortest-term arrangements, usually two-year deals.
In 2010 fees added over 1.13% to the average cost of a two-year fixed rate, discount or tracker, falling to 0.85% on average now.
The data was extracted from details of more than 16,000 buy-to-let mortgage products from 2008 onwards.
David Whittaker, managing director of Mortgages for Business said:
“By including fees we have produced indices 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.”
Mortgages for Business points to the example of one of the lowest headline rates currently available, a two-year fixed rate charged at 2.74% offered by The Mortgage Works. This comes with a substantial arrangement fee of 3.5% of the loan size, pushing the annual percentage rate (APR) calculated over the life of the loan to 5.1%.
However, Mortgages for Business calculates that the true cost of this deal over two years as 4.81%, which is still cheaper than TMW’s reversionary rate of 4.99%. Therefore, the report suggests that using the APR as an overall cost for comparison, as legislated by the regulator, doesn’t particularly help borrowers understand the true costs involved because it fails to recognise the incentive to borrowers to remortgage at the end of the fixed rate/discount period.
The research revealed that buy-to-let mortgage rates available to borrowers have been reducing steadily since 2008, which is good news for investors.