Why mortgage lenders never lose!
I have an apology to make! Not because I did something wrong but because it’s taken me 2 years to write this blog when it should have been written when ‘it’ was first introduced.
‘It’ is a fantastic marketing tool and makes it easier to sell you on mortgage products. ‘It’ is so effective that in fact a lot, if not most of the mainstream buy to let lenders have introduced one.
‘It’ is a Mortgage Arrangement fee which the mortgage lender so kindly allows us to add to the mortgage. Simply adding it to the mortgage apparently makes it OK to charge such an outrageously high fee. In some cases as high as 1.5%!
Some genius first introduced it (l bet they received a promotion) so that they could offer an incredibly low rate or as we call it in the industry the ‘headline’ rate. Don’t be fooled. Remember the adage if it’s too good to be true, it probably is.
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Here’s how it works:
Take a property valued at £100,000 with an £85,000 mortgage. Consider 2 mortgages. Both are tracker rates. One at 5.74% with a £195 fee and the other 4.99% tied in for 2 years with a 1.5% fee.
We’ll consider a period of 2 years because the second has a 2 year tie in period.
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Mortgage 1 - headline rate 5.74%
£85,000 x 5.74% = £4879 x 2 years = £9758 + £195 = Total cost over 2 years is £9,953 or £414 per month
Mortgage 2- headline rate 4.99%£85,000 x 4.99% = £4242 x 2 years = £8484 + 1.5% fee of £1275 = Total cost over 2 years is £9759 or £407 per month.
You can see that over 2 years the difference in each mortgage is very small so even though you pay a huge fee upfront you slowly make it up over the 2 years.
So your choice comes down to one of cheap upfront/expensive cashflow or expensive upfront/cheap cashflow. Often times it may come down to a few pounds difference as in this case £7 per month over 2 years.
I love psychology and this where the mortgage companies have it right in their marketing. By allowing you to add the arrangement fees onto the loan it means you are not using your own money. You don’t actually pay it out of your wallet so it’s easily forgotten. Experience tells me you will re-mortgage about 4-5 times over the 10 years of owning the property. Add up these costs and you could be paying well over £10,000 in fees alone.
So does it really matter which product you take?
Well yes it does. Consider this:
The market is galloping and your place is rising in value and if you take the low upfront you’re locked in for 2 years. So if you want more money out before this period you may have huge fees to pay. If you want the option of extra capital availability over this period, a low upfront may not be the answer for you.
On the other hand it may be prudent to ‘leave some meat on the sandwich’ as Simon and I put it and not pull every last penny out of your portfolio.
Ideally this is where the experience of your portfolio manager can help.
Whatever you choose, you’ll need to come to terms with fees, interest and a whole range of other seemingly extortionate and unnecessary fees and charges if you’re going to build your portfolio.
As one of my property mentors used to say before the time of the internet the more cheques you are writing the more successful you are becoming!
So be aware of fees but don’t lose sight of the big picture. While it may seem like all you ever do is pay people, get excited about the fact that soon you’ll be writing cheques (or internet transfers these days) to yourself for a whole lot more.
Live with Passion,
Brett Wood
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What to do after 2 years cashflow is up? YourPropertyClub in Marrakech - 30 Nov- 3rd Dec 2006 |
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 | I have to give a special mention to Mike, Karen, Cloe and Simon who have all been very patient and helpful throughout the process. Once again thank you. |