Approximately 30 per cent of respondents said that affordability had improved since higher product fees had been introduced.
According to brokers, typical buy-to-let product fees used to range between £999 and £1,999 but are now more often a percentage of the loan, in some rare cases going as high as seven per cent.
Imran Hussain, director at Harmony Financial Services, said that he had seen some product fees of around £8,000, but it allowed the lenders to “drop the rate and make cases fit but also get a return on lending”.
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said that the “main driver” for the rise in fees was rate increases which made it harder to pass the lender’s Interest Coverage Ratio (ICR) for loans with a loan to value (LTV) more than 50 or 60 per cent.
Consequently, lenders have said that to maintain funding to landlords with smaller deposits, fees have increased to allow interest rates to remain lower, he explained.
Some lender fees are ‘excessive’ and just ‘not attractive’
Greg Cunnington, chief operating officer at LDNfinance, said that that technically more buy-to-let ICR requirements are met with lower rate-higher fee products.
Cunnington said many had a five per cent lender fee, which he said six months would sound “ridiculous in the commercial lending sector let alone residential buy-to-let lending”.
“Unless an applicant is certain they are getting a below market value bargain that is just too excessive,” he added.
Cunnington said that the best options for buy-to-let affordability in the current high rate and ICR requirement was that top slice using a client’s personal income. He pointed to lenders such as Barclays, Clydesdale and Bank of Ireland.
He said: “The hope is that a sweet spot can be found with fees lowering to two to three per cent as a maximum, which if the mortgage rate is also competitive will work for some landlords.”
Jane Simpson, managing director of TBMC, said the results of the poll were ‘interesting and somewhat surprising”.
She said: “This is because whilst affordability is still very much a key consideration for brokers and borrowers, we have definitely seen an improvement in the last few months.
“From October to December, the vast majority of cases we looked at were tight on affordability, in many cases we just couldn’t make the deal work despite a large panel of buy-to-let lenders and a team who thrive on the complex cases. Since the New Year, we have definitely seen this ease.”
Simpson said that adding a large fee was “one of the ways to get the headline rate down” and could make affordability more “achievable”
“It’s not necessarily the best route for every client, however for those with lower value properties, this could be a good option,” she noted.
Simpson continued that a number of lenders’ ICR calculations are “too high to make most cases tenable”.
She said: “I appreciate that products need to work for lenders as well as borrowers, but I would really like to see some of these lenders looking for ways to bring ICRs down, whether that’s through higher fees or other measures. Doing so will support clients to make much needed investment in the PRS.”
Buy-to-let sector ‘can no longer function as it has’
Riz Malik, director at R3 Mortgages, said that there were “significant challenges in the buy-to-let market, and I believe it can no longer function as it has”.
“Landlords are already in a financial bind due to the high arrangement fees, which can amount to six to eight months’ rent. Adding these substantial fees to the loans will also have long-term consequences for property owners,” he added.
Malik said that his business used to be “heavily reliant” on buy-to-let deals, but this has fallen as landlords’ ability to refinance, release equity and add to portfolios has been dampened.
“Many landlords may be forced to leave the market unless there is a significant shift, which I believe can only come with a significant reduction in rates,” he said.
Rohit Kohli, operations director at The Mortgage Stop, agreed and said affordability was especially difficult for landlords in the higher tax bracket due to higher stress tests.
He continued that lenders were trying to provide lower rates, albeit with higher product fees, and this had “appeased landlord” looking for a like-for-like remortgage.
“However, those landlords seeking to extract equity are finding it harder to achieve the levels from their portfolios that they had been able to release previously. New landlords are still being discouraged by the choice between high fees or high-interest rates. Interestingly, we’ve seen an increase in some landlords opting to invest in properties in the North, rather than expanding their Southern portfolios,” Kohli noted.
Should I stay or should I go?
Luke Thompson, director at PAB Wealth Management, highlighted that it has been “incredibly difficult” to place cases even for “vanilla” cases due to stress rates.
He continued that to get to an “acceptable rate”, product fees would usually be around two to three per cent.
He said: “This gives landlords a real headache especially those with highly leveraged portfolios as they need to decide if it is worth cutting into their equity to get their monthly payments down.
“I think, to a certain degree, lenders’ hands are tied and a lot will fall to what landlords wish to do with their properties. Some may decide now is the time to sell or they may increase rents to cover the increased monthly mortgage payments.”
