ARTICLE: The ‘Dirty Dozen’ of UK Buy-to-let Mortgage Deals

Faced with rising base rates, UK buy-to-let mortgage providers are seeking to continue to make cash from their borrowers, so they still need to make their deals appear attractive. However, in a highly competitive market place you can be sure that things are not always as they seem at first! You need to know what to look for to make sure you don’t get into a buy-to-let mortgage deal that is not all it seemed to be when you first read the ‘headlines’ about it! So you must look beyond the headlines to fully understand what mortgage deal you are really getting into.

Here are a dozen mortgaging cost factors that you need to be aware of and take account of when deciding which mortgage deal to go along with. Of course you should always take professional advice before getting into any UK buy-to-let mortgage deal.

OK, here they are…the ‘Dirty Dozen’:

1. Exit fees
An exit fee is supposed to be there to cover the administrative costs in closing a loan out when you either pay off the loan or switch to a different mortgage provider. Typically these fees can be any where between around £100 to £200 or more. This may not be very much in mortgage cost terms and that is why mortgage companies get away with charging it. Some UK buy-to-let mortgage deals however do not demand such exit fees, so it is just another thing to be aware of when you are comparing mortgage deals.

Another thing to bear in mind regarding these fees is that some people have found it is possible to reduce the fees to nothing simply by complaining. If you think the fee is unreasonable you could always contact the FSA by complaining in writing if they won’t at least reduce the fee to something reasonable. If you have many buy-to-let mortgages then these costs mount up if you need to move mortgage deals on a regular basis so it is worth doing what you can to reduce these costs

2. Standard Variable Rate
The standard variable rate is a lender's fluctuating rate of mortgage borrowing, typically around 1.5 to 2% higher than the Bank of England base rate. It is also the default mortgage rate when their customers’ mortgage deals expire. This is when the lenders make easy money when borrowers do not move on to a better deal. A real sting in the tail is when this is virtually forced on their customers for a period of time due to something called ‘extended tie-ins’ which we will discuss below.

You should really be looking to find a better deal as soon as you are faced with a UK buy-to-let mortgage deal going on to standard variable rate as these usually represent the worst offers in the market place.

You could actually just go straight onto standard variable rate as a buy-to-let mortgaging arrangement. However, the only possible reason I could see for anyone doing this is to get into a deal that may not have any other form of ‘penalty’ such as the redemption penalties being described later in this article. That would mean that the lender would be free to terminate the loan at any time without further financial implications.

A buy-to-let mortgage deal could be appropriate when the immediate future of an investment is uncertain, for example the owner of a property may not be sure whether they want to sell it or let it out. In the case of buying somewhere to do up and sell it could still work out to be the best option due to low or no charges when the loan is paid off (such as would have to be the case on the selling of the property).

3. Portability
Taking a UK buy-to-let mortgage out on a property often means committing to the deal for at least a year and may be even two or three years or even more. As a lot can change during longer periods, it is important to find out whether you could switch the security for the mortgage over to another property. This means that if you did find good reason to have to move the mortgage onto another property (such as the selling of the first one) then you could do this without financial implications that leave you worse off and the mortgage company better off.

If you find out that a buy-to-let mortgage deal is portable then you should go one step further and find out what the costs would be in actually porting it over to another property in your portfolio. This will be another factor that will help you compare mortgage deals. Depending on your situation it may or may not be significant but you should at least be aware of it.

4. Valuation fees
Before a buy-to-let mortgage provider will lend you the money, they will want to ensure that the property against which the loan is secured is worth the amount you are claiming. A professional valuation is therefore required. The charges for this are levied by the mortgaging company so you will need to check what these fees are as it all adds to the cost of the mortgage.

Sometimes this is offered free of charge in order to try to attract you into taking up that particular deal; other times it may be higher than what you would normally pay for a valuation fee. To me it is just another element to consider in what the overall true cost of the mortgage is.

5. Arrangement Fees or Admin Fees
Mortgage arrangement fees can be very significant and represent a major cost of a UK buy-to-let mortgage deal in the short term. These fees are often added to the loan so the mortgagee does not need you to find such a large amount of money and therefore it is psychologically more acceptable as well as more acceptable to their bank account! For the mortgage provider this is also attractive because they not only charge you the money but then make interest on the amount they have charged over the period that you hold the mortgage with them!

These fees can be up to around 2.5% of the loan figure. Sometimes these fees are a fixed amount rather than a percentage of the loan. Some are even quite reasonable. In general however these costs are quite significant and in my opinion they are just used to dress up an offer to seem attractive, when in actual fact they are going to make a killing out of you!


6. Booking Fees
A booking fee is paid when the application for the mortgage is made and it is non-refundable if you don’t go ahead with the mortgage. In this sense it is a kind of deposit on the deal that covers the mortgage company’s administration costs if you don’t take out the mortgage.

7. Offer Period
Be careful to note the offer period because this is the period over which the one-off fees such as the legal, valuation, and arrangement fees are effectively spread. So the shorter the offer period (ie the period over which the discounted or fixed interest rate is available, before going back to standard variable rate) then the higher the effective charges are when considered on a month-by-month basis. For example, a £1200 fee will cost you effectively £100 per month if the offer period is for 12 months only but will cost you half of that at £50 per month if the offer period is for 24 months, and even less if the offer period is for 36 months.

Another thing to be aware of regarding offer periods is that if the offer period is for a long period of time, say five years, then you may be locking yourself into a deal that seems good now but in three years time would be a poor deal (say if interest rates had lowered significantly by then and you had locked yourself in on a fixed rate deal).

When I look at any mortgage deal it is absolutely fundamental for me to find out what the offer period is. I have heard of some deals that sounded like great deals but then found out that the offer period was only for one year and the arrangement fee was very high; when all the costs were then spread on a month by month basis I found that it would be better for me to stay with the existing provider on standard variable rate!

I always add up the one-off costs and then spread these over the offer period to work out the equivalent monthly charge and then use this figure as the basis of comparing the various deals and also comparing to what I am currently being charged for the loan.

8. Early redemption charges
Most UK mortgage deals involve an early repayment charge often known as ‘redemption penalties’, this effectively locks the borrowers in for at least the length of the offer period and sometimes even longer. Some redemption charges are much higher charges than others and can be dressed up in all kinds of formulas but it is important to work out exactly what this means in currency terms. Often there is a sliding scale of charges depending upon the time at which the mortgage is redeemed. Usually, the longer you have held the mortgage then the lower the charge, but this is not always the case.

9. Legal Fees
It is normal for the person taking out the loan to provide the solicitor to carry out the conveyancing and professional legal advice for the loan. This will involve checking the title for the property, checking that there are no problems that have become evident that could affect the value of the property (including searches into mining, drainage, environmental etc). There will be a fee for the solicitor’s time and additional fees for what they term ‘disbursements’ that are costs for getting the searches done. You will often have to estimate this charge but a solicitor can give you such an estimate on request and it should be the same no matter which mortgage deal you go along with.
These legal fees need to be paid each time you remortgage. Searches are often only valid for a period of three months so these will also need to be paid for each time. There are some mortgage deal offers that include the conveyancing as part of the deal so this will be a saving you can factor in if this is the case.

10. Extended Tie-ins
These are really something to be avoided like the plague! I have however seen many deals being offered that are conditional on extended tie-ins. I for one have fallen foul of this when I was just starting out. Basically and extended tie-in means that you cannot leave (without penalty) for a set time after the offer period ends so you are therefore agreeing to stay on at standard variable rate for that period. May justification for going along with such a deal was merely a hope…ie I was hoping that the interest rates would come down so that the standard variable rate would not hurt so much when I ran into that period of the loan. Well how wrong I was, interest rates have risen and the extended tie-ins are costing me a small fortune each month. I committed to about six of these and the tie-in is for four years!

I doubt I will be taking out any deals with extended tie-ins associated with them in the future having gone through this experience!

11. Higher Lending Fee
These are sometimes charged when the loan to value is above a certain level say 75%. This is basically an insurance fee that the lender uses to take out insurance to cover their selves in case of you defaulting on the mortgage. If this was to happen then they can claim the insurance pay out that would cover the difference between the 75% and whatever you have taken out in LTV (say 85%). They get this money quickly and then would sell on your home to get back the rest of the money. So really it is insurance for the lender and not you! Again, it is another charge to be accounted for when comparing mortgages.

12. Admin Fee
These fees are basically the same as arrangement fees discussed above. It would not be normal to get both an arrangement fee and an admin fee although I suppose all is fair game in buy-to-let. I mean the more costs the mortgage companies can put in the ‘small print’ the better as far as they are concerned as it will lure in more business!


So now you are aware of the ‘Dirty Dozen’. However, as things are always changing, you constantly need to be alert to any additional charges that are included in the mortgage deal. Remember, that after you have signed on the dotted line and sent the mortgage deed in, it is you who have to meet all the obligations and charges or else risk losing the property to the mortgage company!



The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)