Headline rates on BTL mortgages 'disguise true costs'
Headline rates on buy-to-let mortgages are misleading because of the effect of fees, it has been claimed.
Specialist broker Mortgages for Business says that lender, valuation and legal fees are currently adding 0.57% on average to yearly buy-to-let mortgage costs. On short-term loans – two-year mortgages – they are adding around 0.85%.
The results are revealed in 12 indices produced by the broker, which track the average buy-to-let mortgage costs of two-, three- and five-year fixed rate and discounted / tracker mortgage products at 65% and 75% LTV.
The data was extracted from details of more than 16,000 buy-to-let mortgage products from 2008 onwards held in Mortgage Flow, the broker’s bespoke sourcing tool.
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.”
He said that currently one of the lowest headline rates is 2.74% fixed for two years (5.1% APR) offered by The Mortgage Works. However, it comes with a hefty 3.5% arrangement fee as well as the valuation and legal fees which means that over two years the percentage cost is nearer 4.81% – although this ‘true’ cost is still cheaper than the current reversionary rate for products from The Mortgage Works of 4.99%.
The report also suggests that using the APR as an overall cost for comparison as legislated by the FSA 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 or discount period.
Whilst fees can add a considerable amount, the research also revealed that rates have been falling steadily since they peaked in 2008 during the financial crisis, and are currently being driven down by the Funding for Lending scheme.
The indices and accompanying commentary can be viewed here: