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BTL lending margins squeezed as lenders competed in 2017

Lenders absorbed more costs to keep their rates competitive in the last quarter of 2017, according to the latest results of the Buy to Let Mortgage Costs Index conducted by Mortgages for Business.

The analysis showed that the underlying cost of funds rose in Q4 2017. Swap rates remained elevated in particular, in line with the bank rate rise. By the end of the year, two, three and five-year swaps (on which fixed rate mortgages are typically based) were higher than at the beginning of 2017.

As their margins have been in decline since July 2016, buy-to-let lenders chose not to pass on the increase to borrowers. Instead, they opted to squash their margins further.

According to the data, between the beginning and end of 2017, average lender margins over swaps had dropped by 0.4% points.

Commenting on the results, Steve Olejnik, chief operations officer of Mortgages for Business, said: “I doubt that lenders will consider lowering rates again. If anything, I would expect them to find ways of making up for the lost margins, particularly given that overall buy to let lending looks set to dip this year.”

The effect of fees remained largely unchanged quarter-on-quarter, adding an average of 0.58% to the headline rate advertised to borrowers – the lowest amount since Q1 2013 when the index began tracking this data. Fees include lender arrangement fees, legal costs and valuation fees.

The number of buy-to-let mortgage products without arrangement fees was bolstered by lenders as part of their determination to meet targets. Fee-free products accounted for 16% of the market in Q4, up from 14% in Q3, while the proportion of products with percentage-based fees dropped from 44% in Q3 to 42% in Q4.

The proportion of products with a flat fee structure remained the same at 42%. However, the average fee charged by lenders rose by £53 to £1,423.

Olejnik continued: “Looking back over the last couple of years, flat fees have actually come down in price from over the £1,500 mark. The fact that they increased in Q4 could be a sign that borrowers are about to experience price hikes not only on the underlying costs but also at the point of sale.”

“Now is definitely a very good time for landlords to review their borrowing arrangements. If I were in the market for a buy-to-let mortgage, for either a purchase or a refinance, I would consider fixing for five years. And I would be asking my broker about fee-free products whilst there are more of them around.”

The index can be found on the Mortgages for Business website.

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