When interest rates are on the rise, Buy-to-Let lenders may reassess their models to find ways of making rates more appealing to landlords and enhance affordability.

One commonly employed method involves offering a lower interest rate but offsetting it with a higher arrangement fee.

Is this cost-effective for you?

Usually, most borrowers focus on securing a lower interest rate. So, the offer of a lower rate coupled with a higher arrangement fee may catch your attention.

However, the arrangement fee should not be overlooked, especially when it can amount to thousands of pounds.

Traditionally, lenders used to apply a flat arrangement fee on each case. However, many are moving away from this model and adopting a percentage-based approach.

Therefore, the exact amount charged can vary on a case-by-case basis.

At the upper end of the scale, some lenders impose fees of up to 7 percent of the net loan.

This means on a £200,000 deal, you could potentially pay £14,000 solely in arrangement fees, even before factoring in any interest.

In this situation, the advantage of having a lower interest rate may be diminished, especially on higher loan-to-value loans with a short fixed-rate period in a market where house prices are static or falling in some areas.

To add to this, some lenders give you the choice to incorporate these fees into the loan rather than paying them upfront. In this scenario, you would then incur interest not only on the loan but also on the arrangement fee, further increasing the overall cost.

Therefore, although you may think you're getting a better deal, the payments could actually end up being comparable to a higher interest product with a lower fee.

This highlights the need to strike the right balance based on individual circumstances.

Avoid automatically wanting the lowest interest rate, as factoring in all costs and conditions may reveal that it might not be the cheapest deal available.

Consider the arrangement fee as a form of 'advance interest,' as this is essentially how lenders recoup their money when offering a lower interest rate.

It is therefore vital for an adviser to assess what aligns best with your goals and to consider all fees, not solely the interest rate, when determining the most suitable solution.

Get in touch with our friendly and knowledgeable team for more information.