Or as some clients put it, ‘lenders are all as bad as each other, charging astronomical fees which aren’t justifiable in anyway’.
Whilst the intricacies and algorithms lenders would use when deciding how to price themselves is too far reaching and extremely complex for this blog, here I look to tackle on a more simplistic basis that why, in the current climate, lender arrangement fees can go as high as 9.99% of the Mortgage amount. A figure 2 or 3 years ago would have been unthinkable and even more so perhaps would have seen the lender collared by the FCA.
So what I explain to my clients here is that, and moving back prior to the infamous ‘Trussonomics’, you had the at the start of 2022 SWAP rates (another one of my blogs details these) hovering below 1% (having been lower still in 2021) and the base rate at 0.25%.
For a Limited Company Buy to Let Mortgage at 75% LTV on a 5-year fixed product, typically the lowest cost option was an interest rate around 3.5% with a 2% lender arrangement fee. Some Residential rates even dropping below 1% at this stage!
Move forward to today (17/01/2025) and SWAP rates varying at anywhere between 4.1% to 4.35%. The Base rate being 4.75%. Using the example above, lenders are offering an interest rate of 4.99% with a 3% lender arrangement fee.
Hopefully you can see from the above, at a very basic level at least, if it cost a lender 1% to borrow money and they lend it out at 3.5% with a 2% arrangement fee, that’s a better return that if it cost a lender 4.1% to borrow the funds and they lend it at 4.99% with a 3% lender arrangement fee.
So when you have a rate of 4.50% with a 6% lender arrangement fee, you can see from the above the lender arrangement fee is there to cover the shortfall in profit from lending the funds back out at a similar rate to what it cost them.
I’d also highlight that lenders do have a wide range of options, for example 5.59% with a perhaps more palatable arrangement fee of £1,495.00. However with the higher rate comes the higher rental stress test which may not be able to be passed, hence reverting to the lower rate but higher fee option.
So there are wide variety of rates available from each lender, there to cater for those who are looking for a lower interest rate and between return, alongside those who are happy with a higher rate but lower arrangement fee. This being subject to the usual underwriting.
As always it crucial a broker understands your requirements and preferences in full before making the appropriate recommendations for your circumstances.
