Buy to Let Mortgage Fees & Costs Guide

Understanding the Costs of Buying and Financing a Rental Property

When considering a Buy to Let investment, it is easy to focus on two figures: the property price and the deposit.

In reality, the amount of money required to purchase and operate a rental property can be considerably broader.

There may be mortgage fees, valuation costs, legal fees, taxation, surveys, insurance, repairs and ongoing property expenses. Landlords also need to consider what happens when a property is empty or requires unexpected work.

Understanding these costs before making an offer can help you establish how much of your available capital can realistically be used as the mortgage deposit and how much should remain available for other expenses.

This guide explains some of the main costs associated with purchasing, financing and owning a Buy to Let property.

The Deposit Is Only the Beginning

Your mortgage deposit is normally the largest initial cash requirement, but it should not be treated as the total cost of purchasing the property.

For example, having £60,000 available does not necessarily mean that the entire £60,000 should be used as a deposit.

You may also need funds for:

• property purchase taxation;

• mortgage fees;

• valuation costs;

• legal fees;

• searches;

• surveys;

• insurance;

• initial repairs;

• letting costs;

• compliance requirements; and

• financial reserves.

The precise costs depend on the property, transaction and circumstances.

Planning for these expenses before purchasing can help prevent an investment from becoming financially stretched immediately after completion.

Mortgage Arrangement Fees

Buy to Let mortgage products can include an arrangement or product fee.

The way these fees are structured varies between lenders and products.

Some may be a fixed monetary amount.

Others may be calculated as a percentage of the mortgage.

This distinction can become particularly important with larger mortgages because a percentage-based fee can represent a substantial amount of money.

The mortgage interest rate should therefore never be considered without also looking at the product fee.

A Lower Rate Can Have a Higher Fee

The mortgage with the lowest headline interest rate is not necessarily the cheapest mortgage overall.

Imagine two products.

One has a lower interest rate but a substantial arrangement fee.

Another has a slightly higher rate but a much smaller fee.

Which is more cost-effective depends on factors such as:

• mortgage amount;

• length of the initial deal;

• product fee;

• interest rate;

• whether the fee is added to the mortgage; and

• how long you expect to keep the mortgage.

This is why mortgage comparisons should consider the overall cost rather than focusing only on the advertised rate.

Percentage-Based Mortgage Fees

Percentage-based fees are particularly important to understand in Buy to Let lending.

For example, if a lender charged a product fee equal to 3% of a £200,000 mortgage, the fee would be:

£6,000

If the mortgage were £400,000, the same percentage would produce a fee of:

£12,000

These figures are purely illustrative, but they demonstrate why the fee structure can materially affect the overall cost of a mortgage.

A lower interest rate does not automatically compensate for a large arrangement fee.

Can I Add the Mortgage Fee to the Loan?

Some lenders may allow certain mortgage fees to be added to the mortgage rather than paid upfront.

This can reduce the amount of cash required immediately.

However, adding a fee to the mortgage increases the amount you owe.

Interest may then be charged on that additional borrowing.

Adding the fee could also affect the loan-to-value depending on the lender and transaction.

It is therefore important to understand both the immediate and longer-term implications.

Mortgage Adviser Fees

Mortgage advice and arrangement services may involve an adviser fee.

The amount and timing should be explained before you agree to proceed.

A mortgage adviser may assess your circumstances, research suitable lenders and products, help prepare the application and manage the mortgage process through underwriting towards offer and completion.

Adviser fees should be included when budgeting for the overall cost of arranging the mortgage.

Property Valuation Fees

A mortgage lender needs to be satisfied that the property represents acceptable security for the mortgage.

Depending on the lender and mortgage product, there may be a valuation fee.

The valuation is primarily for the lender's benefit.

For a Buy to Let property, the valuer may also be asked to provide an opinion of the expected rental value.

This can be important because the lender may use that figure when assessing rental affordability.

A Mortgage Valuation Is Not a Full Property Survey

This distinction is important.

A mortgage valuation is designed primarily to help the lender assess the property as security for the loan.

It should not automatically be treated as a detailed assessment of the property's condition.

A buyer may separately decide to obtain an appropriate property survey.

A more detailed survey could identify issues that would not necessarily appear in a basic mortgage valuation.

Survey Costs

A landlord may choose to arrange an independent survey before purchasing.

The type and cost of survey can depend on:

• property age;

• condition;

• construction;

• complexity; and

• level of investigation required.

A survey can represent another upfront expense, but discovering significant defects before completing a purchase may be preferable to discovering them afterwards.

The appropriate level of survey should be discussed with a suitably qualified surveyor.

Legal Fees

A solicitor or conveyancer will normally be required for the legal work associated with purchasing or remortgaging property.

Legal costs can vary depending on the transaction.

A Buy to Let purchase may involve work relating to:

• title;

• searches;

• mortgage requirements;

• ownership structure;

• leasehold matters;

• source of funds;

• property purchase taxation; and

• completion.

Specialist transactions can involve additional legal work.

Limited Company Legal Work

Purchasing through a limited company can introduce additional requirements.

The solicitor may need to consider the company structure and the lender's legal requirements.

Where personal guarantees are involved, additional legal advice may also be required.

Legal costs for a company transaction should therefore not automatically be assumed to be identical to those for a straightforward personal purchase.

Leasehold Property Costs

If you purchase a leasehold property, there can be additional costs beyond the mortgage.

These may include:

• service charges;

• ground rent where applicable;

• management fees;

• notice fees;

• deed or compliance fees;

• major works contributions; and

• other charges under the lease.

Your solicitor should investigate the lease and explain the relevant legal obligations.

For an investment property, these costs should also be included when assessing likely profitability.

Property Purchase Taxation

Purchasing an investment property can create tax liabilities.

The amount depends on the property, ownership structure, transaction and applicable tax rules at the time of purchase.

Additional-property purchases can be treated differently from some residential purchases.

Company purchases can also have their own considerations.

Tax rules can change and individual circumstances matter.

For this reason, taxation should be checked using current official guidance and, where appropriate, discussed with a qualified tax adviser rather than relying on an old example or general assumption.

Why Tax Needs to Be Considered Before the Deposit

Suppose you have a fixed amount of cash available for a property investment.

If you calculate your maximum purchase price based solely on the deposit, you could discover later that a significant portion of your savings is needed for tax and other purchase costs.

This could leave you without enough money to complete the transaction.

Purchase taxation and other costs should therefore be considered when deciding how much property you can realistically afford.

Insurance Costs

A rental property generally needs appropriate insurance.

The required cover depends on the property and how it is being used.

Landlords may need to consider areas such as:

• buildings insurance;

• landlord insurance;

• contents where applicable;

• property owners' liability;

• rent-related cover; and

• other appropriate protection.

Mortgage lenders can also impose requirements concerning buildings insurance.

The cost should form part of the ongoing property budget.

Letting Agent Fees

If you use a letting agent, there may be costs associated with finding and managing tenants.

The service offered can vary from relatively limited tenant-finding assistance to full property management.

Depending on the arrangement, the agent may deal with matters such as:

• marketing;

• tenant enquiries;

• tenancy administration;

• rent collection;

• inspections;

• maintenance coordination; and

• day-to-day tenant communication.

Management fees reduce the net income generated by the property and should therefore be included in your investment calculations.

Property Management Costs

Even if you manage the property yourself, management is not necessarily free.

There is a time commitment involved in:

• communicating with tenants;

• organising repairs;

• managing documentation;

• arranging inspections;

• dealing with contractors; and

• keeping up with landlord responsibilities.

Whether you manage the property yourself or employ an agent, there is a cost in either money, time or both.

Repairs and Maintenance

Properties require maintenance.

A landlord should not assume that every month of rent will be available to pay the mortgage or provide profit.

Expenses might include:

• boiler repairs;

• plumbing;

• electrical work;

• roof repairs;

• decorating;

• flooring;

• appliances;

• windows;

• doors;

• gardens; and

• general wear and tear.

Some expenses are predictable.

Others occur unexpectedly.

Maintaining a financial reserve can make these costs easier to manage.

Initial Refurbishment Costs

A property may require work before it can be rented.

This could range from relatively simple decorating to substantial refurbishment.

Before purchasing, consider whether funds will be required for:

• decorating;

• flooring;

• kitchen work;

• bathroom work;

• electrical improvements;

• heating;

• furniture;

• safety requirements; and

• general repairs.

The cost and timing of the work can also affect when the property begins generating rental income.

The Cost of an Empty Property

A rental property does not stop costing money simply because there is no tenant.

A period without a tenant is commonly called a void period.

During a void, you may still have expenses such as:

• mortgage payments;

• insurance;

• utilities;

• service charges;

• maintenance;

• management costs; and

• other property expenses.

There may also be costs involved in preparing the property for the next tenant.

Landlords should therefore avoid budgeting on the assumption that twelve months of rent will always be received every year.

Mortgage Costs During a Rental Void

The mortgage remains payable even when rent stops.

This is one reason financial reserves can be important.

A landlord relying entirely on each month's rent to make that month's mortgage payment may have little room to deal with:

• an empty property;

• late rent;

• major repairs; or

• unexpected expenditure.

Affordability should therefore be considered from the landlord's perspective as well as the lender's mortgage calculation.

HMO Running Costs

Houses in Multiple Occupation can involve different costs from conventional Buy to Let properties.

Depending on the arrangement, the landlord may be responsible for expenses such as:

• utilities;

• broadband;

• cleaning;

• communal-area maintenance;

• licensing;

• fire safety;

• additional management;

• furniture; and

• more frequent tenancy changes.

An HMO may generate higher gross rental income, but that does not automatically mean the same increase in net profit.

Holiday Let Running Costs

Holiday lets can also have a different cost structure.

Potential expenses can include:

• cleaning between bookings;

• laundry;

• utilities;

• broadband;

• booking platform fees;

• management;

• furniture;

• replacement items;

• guest-related maintenance;

• insurance; and

• marketing.

Income can also be seasonal.

The gross booking revenue should therefore not be treated as the amount the owner ultimately keeps.

Service Charges Can Significantly Affect Returns

For leasehold properties, service charges can have a material effect on investment returns.

Two flats generating the same rent may produce very different net income if one has substantially higher service charges.

Landlords should also consider whether major works are expected.

A seemingly attractive purchase price or rental yield can look very different once all leasehold costs are included.

Compliance Costs

Landlords have legal and regulatory responsibilities.

Depending on the property and tenancy, there may be costs associated with areas such as:

• safety inspections;

• certificates;

• licensing;

• property standards;

• electrical requirements;

• gas requirements;

• energy performance; and

• other regulatory obligations.

Requirements can change and can also vary according to the property and location.

Appropriate legal, letting and local-authority guidance should be obtained where necessary.

Accounting and Tax Advice

Property investment can create accounting and taxation considerations.

This becomes particularly important where:

• several properties are owned;

• a limited company is used;

• finance is being restructured;

• properties are being transferred;

• substantial refurbishment is undertaken; or

• a landlord has several sources of income.

Professional accounting or tax advice has a cost, but it can be an important part of operating a property investment properly.

Mortgage advice should not be treated as tax advice.

Interest Is a Major Ongoing Cost

For a mortgaged property, interest can be one of the largest ongoing expenses.

The amount depends on:

• mortgage balance;

• interest rate;

• repayment method;

• mortgage term; and

• changes to the mortgage over time.

For an interest-only mortgage, the contractual monthly payment generally covers interest rather than reducing the original capital balance.

This can support cash flow, but the original debt remains to be repaid.

Fixed Mortgage Deals and Future Costs

A fixed mortgage rate can provide payment certainty during the fixed period.

However, the fixed rate does not normally last for the entire life of the mortgage.

When the initial deal ends, the landlord may need to review the mortgage again.

Future mortgage rates cannot be known with certainty.

An investment should therefore not be assessed solely on the assumption that today's mortgage cost will remain unchanged indefinitely.

Early Repayment Charges

Many mortgage products include Early Repayment Charges, or ERCs, during part of the mortgage term.

These can become relevant if you want to:

• sell the property;

• remortgage early;

• refinance;

• repay substantial borrowing; or

• restructure the investment.

A mortgage with an attractive rate may still be restrictive if your plans change during an ERC period.

The potential cost of leaving a mortgage early should therefore be understood before proceeding.

Remortgage Costs

Owning a Buy to Let property can also involve future refinancing costs.

When a mortgage deal ends, a landlord may consider remortgaging.

Depending on the circumstances, there could be:

• mortgage product fees;

• valuation costs;

• legal costs;

• adviser fees; and

• other associated expenses.

Some mortgage products may include incentives towards certain costs, while others may not.

These should be considered when comparing remortgage options.

Gross Rent Is Not Profit

If a property generates £1,200 per month in rent, that does not mean the landlord is making £1,200 per month.

The rental income may need to cover:

• mortgage costs;

• insurance;

• maintenance;

• management;

• service charges;

• compliance;

• void periods;

• accounting;

• taxation; and

• other expenses.

Only after the relevant costs have been considered can the financial performance of the investment be assessed properly.

Gross Yield vs Net Return

Gross rental yield is commonly used when comparing investment properties.

A basic calculation is:

Annual rent ÷ property purchase price × 100

For example, a property purchased for £200,000 generating £12,000 annual rent would have a gross yield of:

6%

However, this ignores most property expenses.

The actual financial return after costs can be significantly lower.

Gross yield is therefore a useful comparison tool, but it should not be mistaken for profit.

Don't Forget the Cost of Your Own Capital

If you invest a substantial deposit into a property, that money becomes tied up in the investment.

For example, investing £75,000 as a deposit means that capital is no longer sitting readily available as cash.

It may still be represented by equity in the property, but accessing it later could require selling or refinancing.

The amount of capital committed should therefore form part of the investment decision.

Building a Financial Reserve

One of the most useful parts of Buy to Let planning is considering how much money should remain available after completion.

A reserve could help with:

• unexpected repairs;

• rental voids;

• insurance excesses;

• maintenance;

• mortgage payment increases;

• urgent safety work; and

• other unforeseen expenses.

There is no universal reserve amount appropriate for every landlord.

The important point is to recognise that owning a rental property can require cash after the purchase has completed.

The Cheapest Mortgage Isn't Always the Cheapest Investment

Mortgage pricing matters, but it is only one part of the financial picture.

A landlord might spend significant time trying to reduce the mortgage rate while overlooking:

• high service charges;

• substantial maintenance;

• management costs;

• poor tenant demand;

• expensive refurbishment;

• large mortgage fees; or

• prolonged rental voids.

A good mortgage cannot turn an unsuitable property into a good investment.

The financing and the property itself need to be considered separately and together.

Buy to Let Purchase Cost Checklist

Before purchasing a rental property, consider budgeting for:

• mortgage deposit;

• property purchase taxation;

• mortgage arrangement fee;

• mortgage adviser fee;

• valuation;

• independent survey;

• solicitor or conveyancer;

• searches;

• leasehold costs where applicable;

• insurance;

• initial refurbishment;

• safety and compliance work;

• letting or management fees;

• initial periods without rent; and

• emergency reserves.

Not every transaction will involve every cost listed above, and additional costs may apply depending on the circumstances.

Ongoing Landlord Cost Checklist

Once the property is owned, ongoing expenses could include:

• mortgage payments;

• insurance;

• repairs;

• maintenance;

• letting fees;

• management fees;

• service charges;

• ground rent where applicable;

• utilities where applicable;

• licensing;

• safety requirements;

• accounting;

• taxation;

• periods without tenants; and

• future remortgage costs.

Understanding these costs can provide a more realistic picture of the investment than looking at rent and mortgage payments alone.

Speak to Cambs Ely Mortgages About Buy to Let Costs

If you're considering purchasing or remortgaging a rental property, we can help you understand the mortgage costs involved and compare mortgage options based on more than simply the headline interest rate.

We can discuss the mortgage amount, deposit, loan-to-value, expected rental income, product fees and wider circumstances before considering appropriate lender options.

Cambs Ely Mortgages provides Buy to Let and property finance advice to landlords and property investors in Ely, Cambridge, Cambridgeshire and across England, with remote appointments available.

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Important Information

The information contained in this guide is intended for general educational purposes and does not constitute personalised mortgage, investment, financial, legal, accounting or tax advice.

Mortgage fees, property purchase taxation, legal costs, valuation costs and other expenses depend on individual circumstances and may change.

Buy to Let mortgage availability, interest rates, fees, loan-to-value limits, rental affordability requirements and lender criteria depend on the property, ownership structure, applicant circumstances and relevant lender.

Examples used in this guide are illustrative only.

Property investment involves risk. Rental income and property values are not guaranteed.

Appropriate professional tax, accounting and legal advice should be obtained where required.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The Financial Conduct Authority does not regulate some forms of Buy to Let mortgage.