Lenders using percentage fees to clawback margin – Mortgages for Business

Around 84% of BTL deals were five-year fixes in Q4 2018, up from 70% in the previous three months, according to Mortgages for Business’ Buy to Let Index.

The broker also argued that lenders were using percentage-based fees rather than a flat fee to rescue margins lost through competitive pricing.

In total, 97% of landlords now choose a fixed rate. The popularity of five-year fixed rates is likely linked to less stringent tests and the promise of a greater degree of stability in the current, uncertain economic climate.

The report found that the five-year fixed rates slightly decreased to 3.58% in Q4 2018 from 3.67% in Q3 2018. On the other hand, three- and two-year fixed rates stood steady in Q4 2018 compared to the previous three months, at 3.33% and 3.08% respectively.

Steve Olejnik, managing director at Mortgages for Business (pictured), said that for landlords, the preference for five-year rates was both a protective measure and an opportunity to maximise borrowing.

However, he noted from a market perspective, it will reduce the volume of remortgaging over the next few years.

He added: “Both lenders and brokers need to take this into account when projecting business growth.”

Figures from UK Finance obtained exclusively by Mortgage Solutions last month suggest the trade body is expecting this drop in volumes to start hitting next year.

Ltd company majority

However, more than half of all newly submitted buy-to-let applications are from landlords using limited companies, up from 44% in Q3 2018, indicating the continued shift away from borrowing personally.

By value, these applications accounted for 51% of all requested borrowing, up from 39% in the previous quarter. More than half of the BTL lenders tracked now offer products to limited companies.

Olejnik said: “I expect the uptick in the use of limited companies to continue as landlords adjust their investment strategies to cope with the new tax environment and underwriting guidelines for lenders from the Prudential Regulatory Authority (PRA).”

Lender arrangement fees rise

The way lenders charge borrowers has also changed. Nearly half of all products had a percentage-based arrangement fee attached, up from 42% at the beginning of 2018.

Olejnik explained that loans for specialist scenarios tend to be higher and so lenders are able to clawback some of the margins they have lost through competitive pricing by applying a percentage-based fee rather than a flat fee.

He added: “Almost always, there is no incentive for lenders to offer products without fees for more complex borrowing scenarios.”

The average flat fee rose too, from £1,423 a year ago to £1,506, the first time the figure has risen above £1,500 since Q1 2016.

At that time, the average flat fee rate stood at £1,556 when there was a rush of buy to let applications as landlords raced to complete transactions ahead of the introduction of a stamp duty surcharge on purchases of BTL property.