I did actually try to fit this into the previous blog however as it turned out it’s not always a straight forward answer!
So as a suitable follow on from the previous blog around why lender arrangement fees are as high as they are right now, I felt it suitable to give my views on these arrangement fees and if these are short term fix to tackle the higher interest rates (or perhaps, higher interest rates than what we have seen in the 10 or so years prior) and in turn make the rental stress testing more favourable and borrowing and property returns more feasible.
I would hope as well that this blog, alongside the one prior hopefully tackles such comments as ‘it’s criminal’ or even some extremes of ‘it’s the next PPI’.
As I always look to do, it is worthwhile taping into my years of experience to paint a picture of the Buy to Let market place prior to the announcement of Section 24 by the then Chancellor George Osbourne in 2015, the implementation of these changes starting in 2017 and finally taking full effect in 2020.
As I do allude to many times, back in 2015 there really were only a handful of lenders in the Limited Company Buy to Let market. With ‘limited’ competition it did at times seem the few that were in the market all priced themselves in line with each other with lender arrangement fees of 3% – 5% very much the normal practise.
As the Section 24 changes started to take place and Landlords, as advised by brokers (I would have hoped!) spoke to their Accountants and going down the Limited Company route was far more favourable than proceeding in their personal names. This leading to a growing demand for Limited Company mortgages. With the shift in the market lenders were able to access funds at a cheaper rate for what was more and more becoming the ‘norm’ and this, in line with other lenders coming into the market and offering a Limited Company solution and so increased competition, led to far more favourable offerings.
With borrowing costs getting cheaper and more lenders entering the market, this led to the favourable rates and arrangement fees we all enjoyed. An arrangement fee of even 3% seen to be well out of line of the rest of the market not too long ago.
Of course now we have the scenario where 3% can be the lowest available and actually 5% and above is more the normality of the current times!
So will these come down?
The answer is that the lower lender arrangement fees never went away, as covered off in the previous blog, it’s just a case of the corresponding interest rate usually means that the resulting rental stress doesn’t allow for the borrowing required so an alternative solution is needed.
Which is why for me, these lower interest rates but higher lender arrangement fees certainly have their uses and can be used to as part of any portfolio strategy. Some clients have used the lower rates, tied themselves into a deal for 5 years and during their 5 years plan a lower interest rate on some properties allows for higher cash turnover enabling them to expand more aggressively than perhaps a higher interest rate product would allow.
Others have taken the view that these products give an interest rate more in line with their expectations and have the equity in their property to accommodate for this. They see this as a short term solution for a particular property for now whilst they assess the market and their investments over the next few years before deciding how best to proceed next time around.
I will also note that it is my understanding that lender arrangement fees can be offset as an expense. However I would always be led by an accountant as to whether your circumstances allow for this.
So in my view, both landlords and lenders have benefited from the products with the higher fees. Lenders being able to offer a more robust lending option with lower and higher fee products available and landlords benefiting from a wider choice of products to chose from to fit their plans.
