It is fair to say that the UK has one of the most competitive in-depth mortgage markets in the world. The recent emergence of crowdfunding platforms has added yet another string to the bow of the UK market, which now consists of traditional banks, private banks, niche lenders and now crowdfunding opportunities.
Against this background, it is difficult to know where to start when looking for a mortgage.
Before we take a more in-depth look at mortgage lenders operating in the UK, it is worthwhile taking a look at mortgage brokers and what they have to offer.
There have been numerous arguments for and against mortgage brokers since they first emerged many years ago. While some people believe they are just an added layer of cost to the mortgage market, there is evidence to suggest that they more than pay for themselves with the deals they can arrange.
In many ways, whether you choose to go through a mortgage broker is dependent upon your level of experience and knowledge of the market.
However, rest assured that the mortgage brokerage sector has changed dramatically in recent years and is more transparent and upfront than ever before.
When it comes to commission/income, there are a number of options for mortgage brokers operating today which include:-
- Commission from mortgage lenders
- Commission from clients
- A mixture of the two
Whatever type of income structure a particular mortgage broker works on, they are legally obliged to be upfront and make you aware of this before signing any documents.
At this point it is also worth noting there are two particular types of mortgage broker:-
Independent Mortgage Broker
As the name suggests, independent mortgage brokers are not tied to anyone or any small group of individual lenders. Therefore they are able to scour the whole market for the best deals for their customers.
At this moment in time, the depth of the UK/International mortgage lending market stretches to in excess of 300 lending partners. A huge pool of potential funding!
Tied Mortgage Broker
There is a common misconception that tied mortgage brokers are not always as competitive as their independent mortgage broker counterparts.
While they are restricted to a relatively small number of lenders, due to their in-depth relationship with these lenders, they can often arrange very competitive deals.
So, don’t immediately discount the benefits of using a tied mortgage broker.
Different Types of Mortgage Lender
Such has been the development of the UK mortgage market that there are now lenders for every scenario.
Whether you are a foreign national looking to buy in the UK, someone with limited income or even a challenging credit rating, there will likely be a mortgage lender willing to offer you funding.
Obviously, the terms/conditions and headline interest rate/ APR can vary widely depending upon a client’s individual situation.
So, what are the main types of mortgage lenders operating in the UK?
Traditional Bank Mortgage Lenders
Looking back over the last 50 years or so, the UK mortgage market has been dominated by traditional banks on the high street. We are talking about the likes of Barclays Bank, Lloyds Bank, HSBC, Santander as well as a number of leading building societies.
In many ways, this was a closed shop with the vast majority of UK retail mortgage business going the way of the high street banks. However, if we look back to the 2008/9 US mortgage crisis, which led to a worldwide economic downturn (ruining the balance sheet of many banks), it was then that things began to change.
In light of the economic downturn, many traditional banks partially withdrew from the UK mortgage market in order to rebuild their balance sheets.
We also saw the regulators introducing very strict affordability calculations and clearly defining the level of risk they would allow. While it is wrong to suggest that traditional banks are no longer competitive when it comes to mortgage lending, it is safe to say that out with “vanilla” type mortgages, they can be left wanting.
So, while we have private banks, niche lenders and crowdfunding platforms, the traditional bank still has a relatively strong presence in the UK mortgage market.
Private Bank Mortgage Lenders
The first thing to say about private banks is that they operate under very different funding and very different regulations than their traditional banking counterparts. In times gone by, private banks were rarely heard of by the general public and tended to operate behind-the-scenes on an invitation-only basis.
While they have opened up a little in recent times, access to the full range of private banking mortgage deals is often limited with mortgage brokers the more typical route to this particular type of funding.
As private banks operate under very different regulations, they can be more flexible with regards to affordability and collateral. Indeed, the vast majority will offer a wider range of services known as “wealth management”.
Therefore, for many private banks, their mortgage operations offer the opportunity to present very competitive rates to potential clients. The idea is simple; these attractive introductory rates offer the opportunity to expand their relationship with mortgage clients going forward.
This will often incorporate specific services such as asset management, and indeed AUM is often an element of private bank mortgage agreements.
While traditional banks on the high street are still fairly competitive when it comes to “vanilla” mortgages, private banks tend to be more flexible and more competitive when it comes to potentially complex scenarios.
This may involve an asset rich but cash poor client, someone with income streams around the world or those looking to buy UK property without a UK footprint. Even though private banks can offer more traditional mortgage funding, they do tend to focus on specialist requirements.
Niche Mortgage Lenders
In many ways, niche mortgage lenders are positioned somewhere between private banks and traditional banks with a particular focus on, for example, an age range or development mortgages, bridging loans and the like.
The beauty of niche mortgage lenders is the fact that as they specialise in a particular area, they are often extremely competitive in what they offer.
They can also offer specialist advice when it comes to, for example, a buy to let investment and a new client can often open the doors for many funding opportunities going forward. As a consequence, niche lenders tend to have one eye on the future when offering competitive terms to attract new clients.
Those who follow the UK mortgage market will be aware that we have seen numerous developments regarding hybrid funding opportunities. These may involve a traditional element, development funding, bridging loans, etc.
These types of arrangement tend to require both entry and exit routes, refinancing and a large degree of forward-thinking. As opposed to a simple funding operation, many niche mortgage lenders also offer guidance and advice in relation to business opportunities in the real estate sector.
Whatever type of mortgage you’re looking for, however niche you may think it is, there is every chance that there will be provider out there focusing on this particular type of funding.
Again, in many ways, this highlights the virtues of mortgage brokers as a means of accessing the best rates available.
When looking for specialist mortgage funding, you will certainly not be short of options.
The range of specialist mortgages available today includes:-
- Buy to let
- Bridging loans
- Development loans
- Guarantor mortgages
- Expat mortgages
- Second-home mortgages
- Holiday homes
- Mortgages for those in the armed forces
- Commercial mortgages
While this list is by no means exclusive, it does give you an idea of the specialist mortgages available. When looking for specialist funding, many people believe that mortgage brokers are a vital cog in the machine.
They know who to approach/information required and are able to negotiate competitive terms. For example, it is highly unlikely that a traditional mortgage lender, specialising in retail mortgage lending, would be the most competitive buy to let lender.
Getting a Whole of Market Quote
The whole concept of a “whole of a market quote” is the ability of independent mortgage brokers to scour the market for the best deals with no restrictions.
The potentially negative comparison to tied mortgage brokers can be a little misleading. As we touched on above, while you would expect independent brokers to negotiate the most competitive terms, sometimes tied brokers have such close relationships with their lenders that they can be even more competitive.
At the end of the day, it really comes down to the mortgage brokers understanding of the market, contacts and ability to negotiate the best terms for their clients.
This is an industry where mortgage brokers live and die by their advice and ability to negotiate. In many ways, it is the old adage; success breeds success, while failure is difficult to overcome.
Getting the Best Mortgage Deal
There are many different factors to take into consideration when looking for the “best mortgage deal” for your scenario.
We will take a look at the various elements, some of which will surprise you when you look at them in isolation and as part of the overall funding process.
There are numerous free services available today, which will at least give you the basics of your credit score and the recent trend. Before you even approach a mortgage broker/mortgage lender, it is advisable to check your credit score.
The lower your score, the riskier a client you will be in the eyes of a mortgage lender (leading to higher interest rates), so it is obviously important to keep your credit score as high as possible.
There may be certain actions you can take in the short-term to improve your credit score, and indeed you may spot some errors. If you do spot any errors, it is important that you request these are corrected as soon as possible because they will impact any credit references by third parties.
Deposit levels can vary significantly and are linked very closely to the economic environment at the time. In more challenging economic times, lenders will probably ask for a higher than average deposit, while in more buoyant times they may accept a relatively small deposit.
There are also numerous government schemes to assist first-time buyers which will significantly reduce the initial deposit requirements. However, while the regulations regarding deposit levels may change, the principle doesn’t.
The greater the level of deposit you can afford, without overstretching your finances, the lower the mortgage lending requirement and ultimately, the lower the interest payments.
Look Beyond Your Current Lender
As is often the case with products such as insurance, the majority of us tend to stick with third parties that we know. This is no different from mortgage lending, with many people approaching their current account provider when they require mortgage funding.
While it is not to say your current bank would not be competitive, it does make sense to look beyond your current lender to check the wider market.
There may be scenarios where your current bank would be keen to maintain your custom, and therefore they may be flexible and able to match third-party offers. At the end of the day, if you don’t ask you won’t get it!
When negotiating any type of funding, you will likely come across an array of different fees including arrangement fees, overpayment fees, early repayment fees and late payment fees.
At the same time, it is tempting to look at the headline interest rate in isolation you need to take into account all associated fees and use the APR to compare and contrast the real interest rate.
The APR is a rate which takes into account fees as well as the basic lending and demonstrates the “real interest rate”.
When looking at any mortgage arrangement, there are many different factors to take into consideration. Taken in isolation, various factors may seem extremely competitive but considered as part of the overall package they may lose some of their competitive edges.
We are talking about issues such as:-
There is a balance between your mortgage term and affordability with a natural impulse to keep your mortgage agreement as short as possible.
However, this can be counter-productive because shorter term will mean higher monthly payments and could impact your overall financial strength. In many ways, it is sensible to look longer term for your mortgage arrangement, thereby reducing payments and decreasing your short-term cash flow.
Yes, you will pay more interest in the long run, but many mortgages are now flexible and will allow you to make irregular payments to reduce capital.
While interest-only mortgages are nowhere near as common today as they were back in the 1980s, there are still plenty of options. Due to issues with annuity returns in a low inflation low-interest-rate environment, many mortgage annuities failed to cover the initial capital.
This created a financial crisis for the sector with many mortgage customers receiving compensation for “misleading” advice. While there are other means of covering repayment of the initial capital at the end of your mortgage term, many people now look towards repayment mortgages.
These are more expensive because not only are you covering the interest on a monthly basis but also paying down part of the capital. This creates a long-term gain but a short-term reduction in cash flow.
As a general rule of thumb, the maximum lending for a single/joint mortgage is 4.5 times annual salary (combined for joint mortgages), but this can vary from lender to lender.
You also need to take into account the loan to value ratio (LTV), which for many people, will dictate the level of funding available. Traditional banks will carry out mortgage affordability test before agreeing to any lending, but private banks, niche lenders and crowdfunding platforms operate in a different environment and are more flexible.
Whatever route you take, it is vital that you remain focused on your overall finances and basic ability to pay.
The LTV ratio compares debt to the value of the property you are buying. For example, if you were buying a property valued at £100,000 and required a mortgage of £70,000 that would be an LTV ratio of 70% – with the balance being paid via a deposit.
LTV ratios can vary enormously depending on an individual’s financial situation, underlying economy, regulations and in some cases, the level of government assistance available.
For example, first-time buyers in the UK may be able to put down as little as a 5% deposit with the UK government adding to this deposit – thereby reducing the real LTV ratio.
As we touched on above, we have seen huge strides in the UK mortgage market in recent years. Traditionally mortgage agreements were extremely rigid with little or no degree of flexibility.
Nowadays, it is possible to arrange a flexible mortgage which may allow you to increase or decrease your monthly payments within a specific range. Indeed, there are some flexible mortgages which will take into account your current account balance and monthly spending when calculating interest payments.
When looking for more flexible mortgage lending, you need to be aware of potential fees associated with one-off payments. Even though many mortgage lenders have withdrawn these fees, this is not across the board.
Such is the competitive nature of the UK mortgage market that there are some very attractive short-term fixed-rate options available.
While you would need to take into account current interest rates and prospects for the future, many people prefer fixed rates as this allows them to budget ahead with interest payments fixed.
Remember, once a fixed-rate term has expired, you will automatically revert to your mortgage lender’s variable rate unless you remortgage on another fixed-rate.
A traditional mortgage arrangement would see lending provided with the property in question used as collateral. This is fairly straightforward. Where individuals are perhaps asset rich but cash poor, there may be the opportunity to add additional collateral to the deal.
This would reduce the level of deposit required while also increasing the LTV ratio. As additional collateral will be written into the deal, this would still offer a degree of insurance for the lender.
As we touched on above, there is a balance between maximising your mortgage deposit and overstretching your finances. There are numerous ways in which you can raise a mortgage deposit, including the UK government’s help to buy scheme, borrowing from parents or finding a guarantor.
Some mortgage lenders will withdraw the need for a deposit if a guarantor joins in the mortgage lending arrangement. Obviously, they would be liable for the outstanding mortgage in the event that the underlying client defaulted on their repayments.
This is a big ask!
In basic terms, the higher the mortgage deposit, the less funding required and the less interest paid. The size of a mortgage deposit can also impact your mortgage term, which could have a very positive impact on your finances in the longer term.
These are issues to discuss with your mortgage adviser because there is no one size fits all solution. Thankfully, UK mortgage lending participants appreciate this hence the number of different mortgage variations and specialists available today.
Compare Mortgage Lenders
When comparing mortgage lenders, there are a number of factors to take into consideration.
- Headline interest rate
- Initial and additional fees
- Deposit requirement
This is where specialist mortgage advice can be invaluable. For example, a high LTV ratio may seem attractive, but might this impact your long-term financial strength?
Short-term interest rates may be competitive, but what about the variable rate and the APR? Is there a degree of flexibility with regards to mortgage holidays or additional repayments?
It is not difficult to see why more and more people are now using mortgage brokers!
The UK has one of the most competitive and in-depth mortgage lending markets in the world. Whatever type of mortgage you are looking for, whatever specialist area and whatever your financial scenario, there will likely be an array of options for you to consider.
While the traditional high street mortgage lenders are very visible in the press and media, this is not always the case for private banks, niche lenders and the new crowdfunding platforms. These are the reasons why many people use mortgage brokers, many of whom have contacts right across the marketplace.
This can give them access to deals which are not publicly available and in many cases offer the opportunity to negotiate improved terms.
That said, when looking at mortgage lenders and mortgage funding deals on offer, you need to appreciate the basic risk/reward ratio.
The higher the perceived risk in lending to an individual, the greater the required return to compensate for this risk and vice versa.
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 remortgage 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.