Typical total costs of a buy to let remortgage

The overall cost of a buy to let remortgage depends on a number of factors, some directly and other indirectly. This guide investigates all the costs involved and how to assess their impact.

In essence, when you ask yourself “how much does it cost to remortgage a buy to let”, there are a lot of factors at play and you need a tailored picture specific to your needs, circumstances and the current products available from lenders.

Factors that affect the cost of your remortgage

Below is a summary of the factors that impact the cost of a buy to let remortgage:

• Loan to value (LTV): the higher your LTV, the more risk the lender takes on. Rates and monthly payments as a result are typically higher.
• Rental income and affordability calculations: if the rent you receive from your property does not meet the affordability rules of a mortgage product with a low fee, you may be pushed into taking a higher fee deal to get a lower interest rate to make it fit.
• Current mortgage interest rates: At times of economic uncertainty mortgage rates can be high, and vice versa.
• Your credit history: if you have adverse credit challenges, this poses a risk to lenders. Where a lender accepts your application, they typically offer higher mortgage rates to protect themselves.
• Interest rate type: rate types (fixed, variable, tracker) are priced differently, your choice will impact your monthly costs.
• Arrangement fees: this is a cost charged by a lender for taking out a mortgage with them. Some products do not have this fee attached to them.
• Valuation fees: if your lender does not include this for free with your remortgage, you will have to pay it.
• Legal costs: Some lenders will cover all or part of this cost as an incentive to use them, but if not you will have this cost to cover.
• Broker fees: using a broker can make or break a deal, due to the complexity of the buy to let mortgage marketplace, they may charge a fee.
• Early repayment charges: it is practical to remortgage at the expiry date of an existing mortgage, but if you need to do so ahead of this date you may have to pay a penalty for repaying early.
• Product incentives:lenders may offer incentives on remortgage deals to encourage you to borrow from them.
• Property types:Some property types (e.g. Houses of Multiple Occupation, Multi-Unit Freehold Blocks or holiday lets) are more complex and come with higher interest rates.
• Limited company vs personal borrowing: whilst the gap is narrowing, as limited company borrowing becomes ‘the norm’, products for people borrowing in personal name can have lower interest rates.

Buy to let remortgage incentives

A remortgage is a favourable deal for a buy to let mortgage lender to secure, because the lender will know the property has already been valued by a qualified professional, and you as the borrower have shown you can manage a mortgage. For this reason lenders often include incentives on their remortgage deals to draw in custom.

These incentives might include a free valuation, free legal representation or cashback on completion of your deal to help pay towards legal costs (although cashback has grown in popularity as free legals can be less efficient because the legal firm stands to make a very low fee for the work).

These incentives are more common on personal name buy to let applications, but are also offered by some limited company buy to let lenders where the case are typically more complex. Some limited company lenders will offer “fee assisted” legals rather than their covering the full cost, again due to the complexity of those cases.

Incentives can reduce your upfront costs. But, there are other considerations to weigh up.

Arrangement fees

These are charges from a new lender for setting up your mortgage. They can be:

• Fixed cash fees
• A percentage of the loan (for example, 1.5 or 2 percent)

A percentage fee can look low in headline terms but becomes large on bigger loan sizes. Conversely, a fixed fee (for example, £999) can be lower cost on large loans but relatively more expensive on smaller ones. Always compare both the product rate and the total fees. 

Should you add a lender arrangement fee to your remortgage loan?

Adding a lender arrangement fee to your remortgage loan can be helpful, particularly when you need your capital is needed elsewhere, but it’s rarely the cheapest option, because you effectively add to fees by paying mortgage interest on them rather than just paying the one amount chargeable.

To be able to add a lender arrangement fee to the loan, the total loan amount must not exceed the loan to value threshold of the mortgage product. However, this will increase your loan to value. 

If your property does not increase in value by the amount of that fee by the next time you remortgage, this may push you into a higher loan to value bracket and thus higher mortgage interest rates.

Furthermore, if you add the fee to the loan, not only are you increasing your loan amount and increasing the monthly cost as a result, you are also being charged interest on that higher loan amount. If instead you paid the fee outright, and did not add it to the loan, you would not also be paying interest on it.

Arrangement fees versus interest rates

When you remortgage you are likely to face a choice between different fee structures and mortgage interest rates. Some lenders charge a fixed arrangement fee, others charge a percentage of the loan amount. A fixed fee can be beneficial on a high loan amount, where a percentage of the loan would be very costly. Some percentage fees are higher than others, both lender to lender and even product to product within one lender’s range.

By contrast, a percentage fee on a lower loan amount could cost less than a fixed fee.

Loans with low arrangement fees may have a higher mortgage interest rate, which means monthly costs would be higher. Loans with high arrangement fees are often amongst the lowest available interest rates because the lender is covering their costs that way.

There can also be products with no arrangement fee (helpful for minimising upfront costs) but they tend to come with a higher rate, to compensate the lender on this loss of income.

Valuation and legal fees

Lenders require the security property (the property you are borrowing the mortgage for) to be valued by a professional conveyancer. 

This is because, if you have told a mortgage lender the property is worth a given amount, and it is worth less than that, they risk lending you more money than they would get back if you failed to keep up with your mortgage payments and they had to repossess the property and sell it to recoup the debt.

Some mortgage lenders offer incentives with their products, this is especially true on remortgages, because they know another lender has valued your property and you have been paying a mortgage, so the risk to them in lending to you is reduced. 

These incentives can include a free valuation, free legal costs (typically limited to basic legal costs covering routine work, it may not cover any specialist legal work required), or cash-back on completion to go towards legal costs. 

Not all lenders offer these incentives, so you may have to cover the cost of the lender valuation and your own legal costs, but again, our broker team will examine all of this before presenting you with a product, so that what we recommend matches your priorities, whilst also encompassing your needs and circumstances.

Broker fees

When you work with a broker who charges you a fee for their work, you can be confident they are only motivated to secure a deal that is suited to your needs and circumstances.

This is because lenders pay a broker a “procuration fee”, which is a commission for doing all the pre-checks and verification of your case before submitting it to them. Lenders offer different procuration fees, so where these are higher, a broker who is only generating income from the procuration fee could be swayed to place you with a higher paying lender, even if that lender and product  does not represent the best outcome for  you.

Lender arrangement fees can often be added to the mortgage loan, but this tends not to be possible with mortgage broker fees.

Early Repayment Charges (ERCs)

If you exit your current mortgage before the end of the initial rate period, your existing lender might impose an ERC. This cost can be significant, especially on fixed or discounted deals, or if you have only had the mortgage for a small proportion of the initial rate period. 

For example, if you take out a 5-year initial rate deal, and you want to change the mortgage after one or two years, the lender will often charge you a higher percentage of the loan amount as an ERC than if you wanted to exit the mortgage in year three or four.

If you think there is a risk your mortgage plans will change in a given timeframe, then adjust the deals you consider based on the length of the initial rate period (which are typically over two or five years, with some outliers). 

If you need total flexibility to exit your mortgage at any time, because your position is uncertain, you might choose a lifetime variable product with no ERCs. You will then need to weigh up if the mortgage interest rate you can achieve on a lifetime variable with no ERCS will still be financially advantageous over a shorter fixed rate with ERCs.

This is another benefit to working with a broker, the complexities around all of this can become overwhelming and hard to understand. A broker will clear the path ahead and give you a comprehensive picture of the best outcome that can be achieved for you.

How a broker can ease your burden

Arranging a buy to let remortgage is an awful lot to work through and understand, and that is why a broker can be a huge help, because they can calculate these costs for you and find a product that fits the requirements you describe to them.

It is useful to form a picture of what you need or want, before you talk to your broker. Ask yourself these types of questions:

1. Do you want low upfront costs?
2. Do you want low monthly costs?
3. Do you want lowest cost overall?

When you work with a broker they will do all of the due diligence and investigations for you and should present one product that best matches your needs and circumstances. 

If your broker offers you a choice of products based on loose information you have given them then they are not giving you the best possible service they could and are making you do your own due diligence.

This is where Commercial Trust stands out on the service we deliver, we do all of that due diligence for you and we make sure we find out all the details of your case to find you a product which matches your requirements and situation and also guards against a lender declining your application.

Get in touch with our team today for the highest standards in customer service and the very best support right through to completion.