Even though the Internet has changed the way in which financial services are promoted and delivered in the UK, sometimes you do need to speak to the experts.
The mortgage industry is a perfect example of a sector which has benefited from the Internet but also requires experienced brokers to advise those looking to raise funds.
Therefore, in recent years we have seen an increase in the number of people using mortgage brokers. It would appear that consumers now appreciate not only the financial advice available from mortgage brokers but also their significant and potentially money-saving contacts.
Benefits of Using a Mortgage Broker
Before we look at mortgage brokers and what they have to offer, it is worthwhile taking a look at the main reasons why people use mortgage brokers.
You will find that many of the offers agreed by mortgage brokers are not promoted in public and sometimes not even available to the public.
While we will look at the system of independent and tied mortgage brokers later in this article, there is the potential to save significant funds going forward.
Even a relatively small saving on headline interest rates can make a huge difference in the longer-term – remember that the average mortgage is between 20 and 25 years in duration.
In theory, the mortgage application process is relatively simple, but in practice, you may require a whole host of documents before you can even get through the door.
If one of your documents is out of date, or lenders won’t accept it as proof of identification, for example, then you will need to find alternative paperwork. As a consequence, the whole process can be extended significantly.
When using a broker, they will tell you which documents are required – letting you know the fine details as to what is acceptable and not acceptable. If time is of the essence, this can be vital!
Access to the Wider Marketplace
As we touched on above, independent mortgage brokers will have access to the whole lending market, which is in excess of 300 recognised lenders. This gives the enormous potential to negotiate and reduce both headline interest rates and setup costs associated with many mortgages.
Without knowing the costs behind the scenes, terms and conditions and other variations, there is no way an individual with no prior lending experience would be able to scour the whole market.
There are also tied mortgage brokers who only use a specific group of lenders, but they can also negotiate some very attractive terms.
Expert financial advice
If you choose to use a recognised mortgage broker, this means that they will have vast experience and be able to advise you across a whole host of different scenarios.
Where there may be a little light in certain areas, for example, debt management options, they will know somebody in the industry who they trust and can approach.
Having your overall financial advice under one roof is priceless, especially in the current era where the devil can very often be in the detail – headline interest rates compared to APR as one example.
Knowing Which Lenders to Approach
You may not have considered the fact that mortgage brokers know which lenders to approach as a positive for the sector. However, what happens if you are looking to secure funding in the short-term and need to speed up the traditional application process?
Mortgage brokers will have long-standing relationships with leading financial institutions, including traditional banks, private banks and niche lenders. The chances are they will know who to approach, the information they require and how quickly they can deliver your funding.
In some cases, this could be the difference between signing a deal and losing a deal.
Looking at the Bigger Picture
When you are focused on securing short-term funding, the idea of looking at the bigger picture may not even register on your radar. However, let’s assume the example of an individual looking to secure development funding.
Once the funding has been arranged, they can begin work. When the work is complete, the uplift in the property value should be far greater than the cost of the additional work.
This may present an opportunity to refinance the property on the higher valuation figure, thereby repaying the development loan with a mortgage (lower interest rates) and maybe even taking out a little bit of profit.
It is important to focus on exit routes as much as entry points – your lenders will appreciate this!
Independent/Tied Mortgage Brokers
As we touched on above, in effect, there are two different types of mortgage brokers, independent and those who are tied to a relatively small group of lenders.
Many people ask the question, why would you use a tied broker when you can use an independent one? This is a perfectly valid question and one which we will cover below.
Independent Mortgage Brokers
At this moment in time, an independent mortgage broker will have access to more than 300 lenders taking in traditional banks, private banks and niche lenders.
While they may have stronger relationships with some than others, they are not tied in any way and are therefore able to secure the best terms available in the market.
This process is best known as a “wholesale market quote” which in theory would appear to give them the competitive edge over their tied mortgage broker counterparts.
Tied Mortgage Brokers
While in theory tied mortgage brokers will work on a “restricted market quote” this is not always as restrictive as you might automatically assume. Due to the fact that a tied mortgage broker is only working with a relatively small number of lenders, they are likely to have deep-seated relationships.
As a consequence, due in the main to the level of business they direct towards individual lenders, they may be able to negotiate discounts and deals which are not readily available to the general public – or even to independent mortgage brokers..
There have been numerous occasions where clients have been looking to raise funds for specific use in which some tied mortgage brokers perhaps have no expertise.
If they have no expertise in this area, let’s assume it was the buy to let market, then they are unlikely to have a deep-seated relationship with a buy to let lender.
They may know individual buy to let lenders but whether they will be able to negotiate terms as competitive as that offered by an independent broker is unclear.
So, while there are restrictions with regards to tied mortgage brokers, it is not always as clear cut when comparing their services, contacts and negotiating skills with independent mortgage brokers.
Mortgage Broker Commissions
The subject of mortgage broker commissions has in some ways been a bane of the industry for many years now. In the past, there were numerous accusations that some mortgage brokers were favouring particular lenders in exchange for higher than normal commission rates.
While it would be unfair to tar all mortgage brokers with the same brush, there have been times when it was prevalent. However, once the authorities began to take notice of the ever-growing number of complaints, we saw the introduction of new transparency rules.
As a consequence, before you even get anywhere near discussing the terms of potential lending, you should receive a summary of how the mortgage broker operates. This will detail which lenders they are allowed to talk to, commercial arrangements with them and also commission rates.
You will notice that some mortgage brokers charge a commission directly to the client, with nothing from the lender, while others will take a commission off the lender and not charge the client. In some circumstances, you may see a mixture of the two, but whatever happens, you’ll be made aware of the process at a very early stage.
Even though we have seen a trend whereby many customers prefer to pay a fee to their broker as opposed to their broker receiving commission from a lender, there are still broker/lender commission arrangements.
As long as everything is transparent, the figures are competitive, and above all, you are getting the best deal on the market, surely this is a win-win?
Different Types of Mortgage Lenders
If you are positioned on the outside of the mortgage market looking in, your mind will probably be dominated by traditional banks which have historically been the main mortgage providers in the UK.
This situation has changed somewhat over the last decade, especially in light of the 2008 US mortgage crisis which saw many UK banks suffer huge hits to their balance sheets.
As a consequence, restrictions were introduced for traditional banks offering mortgage finance. We have since seen the emergence of private banks and niche lenders who have taken a substantial share of mortgage business from traditional banks.
When we talk of traditional banks, we are looking at the likes of Barclays Bank, Lloyd’s Bank, Santander, etc. – the fathers of the UK high street. As we touched on above, for many years, traditional banks dominated the mortgage market with private banks and niche lenders often operating away from the public gaze.
Many people will assume that because private banks and niche lenders have “come out of the shadows”, this means that traditional banks are not competitive with regards to mortgage lending. This is not always the case.
As you will find when discussing the pros and cons of different mortgage lenders with your mortgage broker, traditional banks can still be extremely competitive with what are best described as “vanilla mortgage loans”.
These are loans which are relatively straightforward and not the more costly and often time-consuming bespoke mortgage funding services offered by many private banks and niche lenders.
In the past private banks have operated away from the public gaze often only approachable through trusted parties. This in itself has placed mortgage brokers in a very strong position as private banks often prefer to speak to like-minded knowledgeable professionals.
Obviously, there will be some form of contact with the end customer, but on the whole, any mortgage funding raised via a private bank will be done through the mortgage broker.
The main reason why private banks have become so popular in recent times is the fact that they operate on a very different basis to traditional banks. They raise their liquidity in a different manner, have less restrictive regulations, and therefore tend to be more flexible than their traditional bank counterparts.
As a consequence, it is possible to create a bespoke mortgage which will be sculptured around a client’s individual circumstances as opposed to selling a one size fits all products.
There will be occasions where the headline interest rate/APR is higher than normal, but this will reflect the underlying finances of the client and their particular scenario.
Traditional banks tend to cover the majority of financial services, but they are not always the most competitive – private banks often being more flexible and more competitive. When it comes to niche lenders as the term suggests they will focus on a particular type of mortgage whether this is a development mortgage, buy to mortgage or even a commercial mortgage.
Due to the fact that their business is focused on that particular area, they can often be extremely competitive because of the sheer volume of business they attract.
While some financial institutions could be described as a “jack of all trades, master of none” you will find that niche lenders tend to focus on relatively tight criteria.
They will tend to have a greater understanding of their market, be able to suggest alternatives or mix-and-match the various options, thereby ensuring the most competitive deal possible.
While you may have a particular idea in your mind when approaching a mortgage broker, it is very important that you listen to the advice coming from potential lenders with regard to options in the wider market. They could create some potentially huge savings!
Mortgage Affordability Test
The mortgage affordability test revolves around income and allows mortgage brokers to calculate maximum funding, required deposit and the LTV (loan to value) ratio. When it comes to traditional banks, the standard rule of thumb for mortgage funding is a maximum of 4.5 times an individual’s annual income or 4.5 times a couple’s income with a joint mortgage.
There will also be various restrictions on the LTV ratio dependent upon the type of mortgage and the financial status of the individual(s). These restrictions are dictated by the Financial Conduct Authority (FCA), which is the regulator in charge of the UK financial sector.
The situation with regards to private banks and niche lenders is very different because they are funded in a very different manner. As a consequence, they can be more flexible and on occasion even offer that elusive 100% mortgage although probably under exceptional circumstances.
They can also bring in different arrangements such as Assets Under Management (AUM) as part of a basket of additional services available – often referred to as “wealth management”.
Different Types of Mortgages
Once you begin to look in detail at the services offered by mortgage brokers, you will see that many of them specialise in particular areas.
Buy to Let
The buy to let market has been extremely competitive over the last 20 years although the recent introduction of tighter regulations/new charges have certainly reined in some investment returns.
However, whether you are a first-time buy to let a buyer or you are looking to maximise your existing property portfolio, there will no doubt be various options available to you. Using a mortgage broker allows you to reach out to specialists lenders with the possibility of creating a long-term relationship.
This could lead to ever more attractive buy to let mortgage rates in the future and open doors to an array of other financial services.
Many private banks use mortgages as a means of enticing new customers towards their “wealth management” services. This can open up a whole range of different options including AUM, investment, tax planning and other financial services.
While there is obviously a benefit to the lender/wealth management provider, there is every chance your mortgage broker will be able to negotiate extremely competitive terms.
As we touched on above, in previous years, the residential mortgage market was dominated by traditional banks. While they tend to offer “vanilla” mortgages, the introduction of tighter regulations in light of the 2008 US mortgage crash saw many reduce their exposure to the market – with those remaining often becoming less competitive.
This opened up a huge gap for private banks/niche lenders as well as crowdfunding property websites which have also come to the fore over the last ten years or so.
It will be interesting to see how traditional banks react in short to medium-term, will they be competitive, or will they specialise in particular areas?
More visibility for private banks and niche lenders, together with the new crowdfunding platforms, has also put extreme pressure on traditional bank mortgage margins. All to the benefit of clients!
Commercial mortgages are basically loans secured against a property which is not your residence. The most obvious high-volume commercial mortgage is a buy to let, but this is so influential that we have already covered it separately.
There are numerous reasons for raising funds via a commercial mortgage which include refinancing business premises, thereby releasing equity and increasing cash flow. There may be occasions where you are asked to act as a guarantor for a commercial mortgage (for your business), or you may be offered a relatively low LTV.
This is where mortgage brokers come into play, scouring the market for the best deals and the best terms which suit your scenario.
It is also worth noting that the interest paid on a commercial mortgage is tax-deductible within a company structure, something which has attracted many people.
Obviously, any loans taken out in a company name must be used for company purposes, but it can be useful to know.
Bridging loans tend to be relatively short-term, and as a consequence, every percentage point will count when negotiating the best deal. Tradition bridging loans are used when individuals are moving home, and the sale of their first property has not gone through.
There are also various business activities which can make use of bridging loans while awaiting future income. The numerous aspects to take into consideration when negotiating a bridging loan include the term, headline interest rate, APR, flexibility, stage payments as well as an exit route in the shape of refinancing.
As we have seen in the aftermath of the coronavirus pandemic, it tends to be short-term finance which struggles in troubled economic times. Experts believe that those who have bridging loans coming to an end during the next 3 to 6 months may struggle to refinance on acceptable terms.
The reality is there are still lenders active in the bridging loans market but whether or not they are all visible to the general public or by invitation only is something worth investigating.
Development loans tend to be relatively short-term, although, in reality, they can last from just a few weeks to a year or beyond. As with bridging finance, it is very important to find a flexible arrangement because in the world of property development nothing ever seems to go to plan.
Again, stage payments and competitive interest rates/APR are extremely important with this type of transaction. The idea is simple, acquire a property, redevelop it and then refinance on the enhanced value – well that is the theory!
There are obvious risks with development loans which include an increase in building costs, a less than expected increase in property value or a lack of buyers in the market.
As a consequence, creating the largest buffer possible between your property investment/development funding and the value of the project is very important. This is to all intents and purposes the lender’s insurance policy; the greater the buffer, the more likely you will be able to negotiate extremely competitive terms.
At some point, you will probably need to refinance the development loan into a traditional mortgage – another area where mortgage brokers can prove extremely helpful.
As we touched on above, many residential and commercial customers may, at some point, choose/need to refinance their mortgage debt. This may be a consequence of a natural increase in the value of a residential property (equity release); better mortgage rates available in the market or repayment of a development loan by refinancing on an enhanced property development value.
Mortgage brokers will help you with not only your entry point, i.e. the mortgage lending agreement but also an exit point and refinancing when applicable.
One of the keys to a smooth refinancing is to have the exit route in place, and your alternative finance, before the original lending deal has run its course.
While there is some debate/argument as to the level of value mortgage brokers offer both residential and commercial customers, there are many benefits to consider.
There is also a great focus on tied mortgage brokers as opposed to independent mortgage brokers and the restrictions on the type of products they can offer. The truth is that even a tied mortgage broker may be able to negotiate extremely competitive terms simply because of their relationship with their small group of lenders – and the volume of business they pass their way.
In theory, you would expect an independent mortgage broker to find the best deals, the most competitive terms and the most attractive headline interest rates/APR. However, this is not always the case……
How Can The Mortgage Bank Help?
Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.
They have already helped thousands of people get the best mortgage deal even people that have been refused before, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.