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Category: Up for discussion

What are the real costs of mortgage advice and who pays a brokers commission?

I’ve decided to write about the real costs of advice to consumers, to dispel some of the myths and preconceptions.

As a forward, I thought I’d explain my misconceptions prior to getting involved in financial services sometime back in 2005.

A few years earlier price comparison websites had appeared in the market launching with the message that they “cut out the middleman” and offered better value to the customer by removing their “margin” on the deal.

So before I started working in mortgages I believed that a broker was someone who took a product, added their percentage on top and sold it on.

Since working in the industry though, I have realised there is a myriad of similar misconceptions floating around.

Some people think the arrangement fees on a mortgage deal are to pay the broker.

Some are convinced the lender will offer a better rate direct.

But are any of those assumptions even remotely based on reality?

Let’s start with the idea that middlemen just add margin onto a products price.

I’m a keen photographer and if you share my interest you might well be familiar with the absolutely awesome Sony a7 range.

I won’t waste your time taking you on a photography lesson. But I will show you what you already know.

Sony a7 on the sony website

This picture above is from the Sony UK website for an A7 with kit lens showing a retail price of £1509.00 today on 08-06-2018.

Now we have the same camera and lens on sale with a “middleman” called Jessops and it is, after cashback 50% of the list price on the same day.

Sony a7 at Jessops

Sony’s own retail shops are selling the body only for the same price Jessops offer with the kit lens and the lens is upwards of £400 on its own.

In short buying direct from the manufacturer could cost you twice as much.

But you already know this. You already know that the idea of middlemen adding cost to everything is a fallacy.

Distributors in every industry will often have superior deals. We all see this every day.

Most of us have seen Trivago girl a million times telling us how they compare all the different prices for thousands of hotels daily, but does anyone really think you would get the best deal by phoning the hotel?

So how does pricing in the mortgage industry really work? And how much does our advice cost you?

Lenders whose products are the same through every channel.

Some lenders offer the same range of deals through every channel and have made promises to the market to never do what we call dual pricing.

This means whoever you go to be it direct to the lender, or any broker the deals available will always be the same.

Examples of this are Barclays and Coventry Building Society but there are many others.

For these lenders, if the broker offers you a fee-free service the lender is paying the cost of our commission.

You need to be aware though, that we might recommend a product based on best value for money, and another adviser might just recommend the lowest rate.

You need to discuss with both parties to work out why two different deals might have been recommended.

But if you have access to all the same deals through both, then you cannot be paying the cost of advice unless the advisor is charging an additional fee.

And this should not be confused with a product booking or arrangement fee.

Lenders will usually release multiple rates at the same loan to value.

Some with a lower rate, and an arrangement fee (often around £999) and other deals with no arrangement fees and slightly higher rates.

This is just offering deals to appeal to different customers with different sized loans and has nothing to do with the broker.

You can see in the example below Natwest offering various two-year fixes with different fees and cash backs.

And the best value product for each customer would depend on their loan amount, term, whether it was a repayment mortgage, and whether they would have to add the fee to the loan.

Lenders who do offer different prices and product ranges.

Other lenders like Natwest, for example, do offer different ranges direct at times to those they offer through brokers.

So, the assumption is that using us is going to be more expensive, right?

Think again.

For various reasons lenders might offer much cheaper products via a broker than they do direct. As counter-intuitive as this may seem.

Below are two more screenshots from February this year.

Example of Natwest products from our sourcing system

Disclaimer – These rates and products were available in Feb 2018 but are used for example purposes only and are no longer available.

The first is from our sourcing system showing deals available with NatWest at 90% loan to value.

The product highlighted in black with yellow text and the product in blue text are both exclusive rates offered through various mortgage clubs for brokers at the time.

And then below are all the deals NatWest were offering to customers via their website at the same time.

Image of worse rates available direct

Notice that our exclusive 2-year fixed was 0.5% cheaper than their direct deal, despite the lender paying us a commission of around 0.32% (the total is actually more as some will go to the mortgage club too).

So why on earth would the lender offer deals through brokers that in total cost them more than 0.82% in profits against their direct business?

You have to think about what we actually do because the lender would have to do all the same work.

That’s a professional adviser spending several hours on the phone to each customer. Hours spent processing documents, completing application forms, preparing compliance files and suitability reports.

They need the staff to cover this in a seasonal industry, so they would then have little to do half of the year. Those staff members go onto their pension scheme and pay national insurance and tax on their incomes.

They need to cover professional indemnity risks, telecoms cost, office space, computers, training, and development, staff turnover, and recruitment.

And then there is the fact that the broker market is also an advertising channel and comparative to paid advertising.

Now, this doesn’t mean that we will always have better deals with every lender. Often there will be little or no difference at all.

On occasion, their direct deals might be better.

Sometimes we will offer something a lot cheaper with the same lender. Other times our deals might not be as good.

Basically, there is no way to guarantee you get the best deal.

So the question really becomes one of time, stress, convenience and quality of service.

Do we end up pursuing the “best deal” when the cost of doing so outweighs the benefits?

I think the answer here comes down to the differences between using a broker and going direct.

In my view, with a good broker, you are going to be every bit as likely to get the best possible deal as you would be searching the market yourself with the difference being you don’t have to go through the hassle of doing that.

You’re also more likely to be protected from significant pitfalls.

I am going to follow this article with some others, one which highlights a life insurance provider whose contractual terms are so poor in comparison to their rivals I cannot justify recommending them and another one about the possible pitfalls of not taking advice.

Each article highlights how self-advising without a professional level of knowledge about implications like taxation, and different contractual terms could see you buy a cheap deal that incurs huge additional costs amounting to tens or hundreds of thousands of pounds over a lifetime.

Now we don’t want to scaremonger or imply that these risks apply to every transaction, but the point is to highlight the real benefits of advice that extend far beyond simply getting a good deal or better service and that even if that occasionally costs you more, it’s probably a cost worth paying for.

So make sure to come back and check out those articles over the next few weeks.

How the potential collapse of the Euro could affect your mortgage costs

Whilst it remains unclear how close we are to a collapse of the Euro, one thing is clear; predicting how the fallout would affect financial markets is no easy task, even for seasoned financial experts.

In pure mortgage terms, one set of products appears to be particularly risky in the current market; is any which tracks a variable rate as opposed to the Bank of England base rate. These include discounted rates, variable rates and Libor-linked or Libor-rate deals.

All of these products could be subject to increases if the Euro collapsed, even if the monetary policy committee of the Bank of England decides to keep interest rates low.

When the BOE base rate was reduced heavily in 2008, many lenders did not pass these cuts into their variable rates for some time; as doing so would have seriously jeopardised their ability to remain afloat.

Similarly, in the scenario of the collapse of the Euro and or the default of a nation such as Greece, Spain or Italy, this would undoubtedly cause a similar crisis in the banks leading to a drying up of money markets and upward pressure on banks’ variable rates.

Most discount-rate mortgages are offered by smaller building societies, which typically have a much lower risk exposure and would be better insulated against having to raise their variable rates significantly in a similar scenario. However, they are not immune to this risk.

More concerning, though, are Libor-linked deals; these are linked to the going rate of lending between UK banks and could rise a lot if we saw more market turmoil.

Even so, tracker deals could still be a risk; who knows how the different repercussions of this kind of event could ultimately play out?

So when looking at current products, comparing the difference between fixed and variable rates, in general, is well worth doing. I would take a pragmatic approach where the difference is minimal, as it seems likely that the last string of bailouts may yet prove to be the tip of the iceberg.

The time is right to reduce your mortgage borrowing

Many people blame subprime mortgages for the credit crunch; others point the finger at merchant banks and hedge funds, whilst some have even suggested that China is directly at fault for the current state of Western finances.

To a certain extent, all these views carry some merit (particularly regarding the subprime mortgage sector). But another factor that comes into play regarding those mortgages; is perhaps more fundamental and likely to cause long-lasting damage.

Over the last decade and a half, the average house value skyrocketed. Some houses increased by as much as 100% in value over a decade. This rise in prices; sustained by a ready supply of credit on increasingly generous terms; increased demand massively, and due to the relatively fixed housing supply, the only place prices could go; was up.

That resulted in large numbers of people taking loans far beyond their means. It seemed that everyone could get a large enough mortgage to pay for a house regardless of their financial circumstances.

For those who have stretched their income, now is the perfect time to reduce your borrowing and save money in the long term on your mortgage repayments.

The new government and the recent emergency budget indicate we should see relatively low-interest rates for some time, although the bank base cannot remain this low forever.

So it is time to look at remortgaging, and trackers, in particular, can look like good value for money in the short term.

There are several ways to reduce your mortgage in this period of low-interest rates.

You can remortgage and reduce your mortgage term, but pay attention to how this will affect your repayments when rates do rise.

Another option is to look at offset mortgage products which allow you to pay no interest on the equivalent amount of savings held in the offset account; however, offset rates continue to be uncompetitive.

For many, the best way to reduce your mortgage may be to use a savings account and then use the typical 10% overpayment facility on most products.

It’s worth checking whether you have the right to make overpayments and to what extent. Savings interest rates aren’t too attractive currently, but banks like Santander offer some excellent deals on savings accounts that are worth a look.

If you’ve survived the bubble bursting; whatever state your finances are in, it may be a good idea to pay down any debts you have whilst interest rates are low and save what you can to give yourself a bit of a cushion; so should the situation deteriorate further, or if interest rates rise in the future, you are less exposed to increasing costs.

The end of self-certification mortgages?

I wrote an article some time ago about the FSA’s proposed changes to end self-certification and fast-track mortgages; I made a big point about how this could leave many people struggling to refinance and cause trouble for the recovery of the housing market.

The FSA confirmed last week that they would take action; the press has been making similar observations to my own today about the impact any regulation could have on our recovery and those borrowers with an existing loan of this type.

But over the weekend, I had a realisation; and made a U-turn on the subject. In reality, there are few legitimate borrowers who cannot “prove” their income.

The point is that the word “proof” and its interpretation is the key detail. Almost all people can show evidence that the income they declare is broadly accurate; they may not be able to prove income in the manner that a traditional full-status mortgage would require.

For example, if you have a business from which you could take far more income than you currently do without running it into decline, that is your prerogative.

You should still be able to evidence in a suitable way that your business has the potential for you to take further income and that the loan would then be affordable.

It may not be satisfactory at your local building society now, but lenders with good product development teams will soon see how to create a new type of product to cater for this market once their appetite comes back.

So if the FSA gets this legislation right and does not dictate or define what proof consists of, then there will still be the opportunity for lenders to market products for those with non-standard income, priced above full-status products as before but simply requiring some evidence to back up that the income declared is not a total fabrication.

The FSA just need to be careful not to try and make this legislation so watertight that it chokes the housing market to death.

Who needs Self-Certification Mortgages?

There have been muted announcements from the FSA that indicate they may ban fast-track and self-certification mortgages for people in full-time employment; there still seems to be a lack of understanding of what self-cert is for.

Self-certification lending is intended for those who cannot prove their income; or for whom traditional lending practices of considering variable income at a rate of 50% would cause unfair difficulty in borrowing.

Many types of employment are paid predominantly in commission income, such as recruitment consultants, estate agents, business development managers and stock brokers.

These are all forms of employment that may produce a need for self-certification.

Others that own a business which produces very irregular income streams; such as those in the tourism sector; or paid upon completion of irregular contracts, may also need to self-certify; particularly when self-employed.

What it is not is a means to inflate income. Lenders will withhold the right to contact employers and ask for bank statements and other supporting information. So if the figures are out of the ordinary, lenders should be asking questions; hopefully, if the FSA keep this in mind, it won’t be banned.

There is a home for self-certification that shouldn’t be ignored.


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