Switching your buy to let mortgage can be a good way to cut down on running costs and plan for the future – but remember to take the cost of remortgaging into account.
Remortgage activity was the primary driver of buy to let lending in the second quarter of 2015 , and between the landlord tax announcements in the July Budget and renewed talk of interest rate rises, Q3 could well see yet more landlords switching their loans.
If you are planning to refinance your property, it pays to know what sort of costs you may encounter so that you can budget ahead of time.
Costs from your current lender
Early repayment charge
The majority of products are subject to early repayment charges during the initial deal period, which is typically between two and five years. Early repayment charges (ERCs) are usually a percentage of the amount repaid.
You should therefore be wary of switching mortgage during an ERC period, as the charges will be levied on the full outstanding loan amount.
Some buy to let lenders also charge exit fees (sometimes called ‘discharge fees’, ‘mortgage fees’ or ‘redemption fees’) for repaying the loan in full before the end of the mortgage term, including when you switch mortgage – though an exit fee may not be levied if you stick with the same lender.
This fee is typically a fixed amount between £50 and £300.
Fees for switching before a mortgage completes
A further switching fee may be charged if you change deals prior to the completion date for a mortgage you’ve already applied for. In addition, you might lose any other fees you’ve paid up to that point – so be mindful that you are applying for the right deal!
Costs from your new lender
There are several different types of fee that a lender might charge for a new buy to let mortgage loan. Not all lenders will charge all of these fees, many of the terms can be used interchangeably and they can often be rolled up together.
However, your mortgage advisor should always provide you with a detailed breakdown of what you need to pay, how, and when.
This fee is charged, as the name suggests, upon application, and is usually non-refundable. It might also be called a ‘booking fee’, and is charged for reserving your chosen product whilst your lender processes your application.
Insurance administration fee
If you choose to take out landlords building and contents cover with an insurance provider other than your lender (or a provider chosen by your lender), you may be charged for the cost your lender incurs in checking that the cover is appropriate.
This might also be called a ‘freedom of agency fee’, an ‘own building insurance fee’, an ‘insurance contingency fee’ or many more besides – but you should always be told what the fee is and why you are being charged it.
Your lender will usually charge you fees to cover the cost of instructing their own conveyancing solicitors. There is typically far less legal work involved in a remortgage than a purchase, and the legal fees are therefore likely to be lower. Your lender might even offer free basic legal fees as an incentive.
Mortgage account fee
A fee for setting up and maintaining a mortgage account, an account fee is usually non-refundable and added to either the up-front costs or the loan principal, at your lender’s discretion.
This is usually the main fee advertised by the lender, and can either be a set amount or a percentage of the loan. Some buy to let mortgages are advertised as ‘fee free’ – this usually means that they have a product fee of zero.
You might see product fees referred to as ‘arrangement fees’ or ‘admin fees’, as they essentially reflect the cost of processing the mortgage application. They could also be called ‘completion fees’.
Lenders will often allow you to add this fee to the loan amount (subject to affordability, loan-to-value, rental cover and other applicable criteria). Bear in mind that if you do this, you will need to pay interest on the fee amount, which will increase the cost of your mortgage in the long term.
This fee covers the cost of the telegraphic transfer of funds from your lender to your solicitor, and may be charged by either party if it is charged at all.
Usually charged on a sliding scale relative to the value of your property, these fees cover the cost of the property valuation. They are usually payable up-front and are only refundable if the valuation does not go ahead.
Many lenders offer free or reduced valuation incentives to remortgage customers. This is usually subject to a maximum amount.
If you have sourced your new mortgage through an intermediary, such as a buy to let mortgage broker, a broker fee may also be payable.
This fee reflects the work undertaken in matching you to an appropriate mortgage and packaging the deal for the lender in order to give you the best chance of acceptance.
- “House purchase lending up 22% in June”. CML. 11 Aug 2015.
This article is intended for information purposes only and should not be taken as advice.