If choosing a mortgage lender and finding the right mortgage was easy, I wouldn’t have a job.
So it is a double edge sword for us. It’s great to have choice, but too much choice is a bad thing. (As is common these days, it can lead to analysis paralysis). To give you an idea of the task at hand, research from Twenty7Tec . (A leading fintech firm that provides data in this area) earlier in the year estimates that there are nearly 12,000 mortgage products available via brokers. But only 2,000 if approaching a bank directly.
The mortgage market is complex
This shows that brokers have more than 6 times the choice available to them when choosing a mortgage lender, in comparison to you researching this on your own. Why? That will largely be down to the complexity of the market. Brokers are more in tune with taking the advice risk compared to a bank.
Also, why would you ever rely on a bank advising you when they have been responsible for the MPPI mis-selling scandal. LIBOR Rigging, Credit Crunch, Endowment mis-selling scandal… I could go on, but you get the point. As a broker we work for our clients (you) and have your interests at heart.
What I will outline here are key considerations when coming to select the most appropriate mortgage. So you can save as much money as possible, while getting the most suitable product. As often these two things are not the same:
Surely getting the lowest rate on a mortgage is best?
In a word, no. This reminds me of the classic saying. Price is what you pay, value is what you get – the lowest rates available are typically variable rates. This is not always the case, as it depends on what the market is doing, but that is broadly the case now.
Do you want to run the risk of choosing a mortgage lender with increasing payments if rates go up?
If rates go down, can you be sure your lender will pass on the saving to you? (As a result of historically low rates, many lenders have written a clause into their contract that if rates go down, your payments will not.) This is what is called a collar. Please look out for this in the T&C’s at the back of the illustration/offer. In fact, in ome it isn’t even mentioned at all on the quote you get. I know, the B*******…)
So even in that simple example, it is a minefield of T&C’s and risk. You cannot only go by a headline rate on the product as it depends on what the product is. (Be that Fixed or Variable).
What impact do fees have?
Another trick lenders use is to offer a low rate but high fees. Consider the impact of fees when choosing a mortgage lender.
Most lenders offer a range of fees on their products from no product fee, then typically fixed fees of £999 |£1,999 or a 0.5% or 1% option. The general relationship is the higher the fee, the lower the rate. We are not against high fees, as if the rate is low enough that may make sense for you.
A rough rule of thumb is the larger the loan the more you benefit from this. Then equally the converse is true, the smaller the loan, the more focused you should be on fees or even look to avoid them all together.
The actual product fee is also not the whole picture. Lenders charge huge variances in survey fees, from free to many thousands. This should also be factored into the overall cost. As should other fees like Application Fees. (Yes, you sometimes get changed a fee to apply, and then a fee for the product…). Deeds Fees, Redemption Fees, Survey Admin Fees (as above) & any other novelty things they choose to charge you for. While illustrations are standardised, what fees lenders charge are not.
Surely the APRC was introduced to see past all of this?
Yes, it was, but it doesn’t work. Let me explain why the APRC can be tricky to fathom when choosing a mortgage lender. The APRC (Annual Percentage Rate of Charge, formerly APR) was introduced to calculate the total cost of a loan, including all the factors I mentioned above. However, it is flawed for 2 key reasons:
- It assumes you stay with your lender forever, and pay their higher variable rate for the remainder of the mortgage term. (For example, if you take a 2 year fixed rate on a mortgage over a 30 year term, it will calculate 2 years on the rate you will pay on the fixed rate. This can be as low as 1.05%, and assume you pay the higher variable rate, typically between 4.5-5% for the remaining 28 years).
- It assumes rates do not change, you do not make overpayments or you do not change lenders. In fairness, you can’t model what will happen after your product period, but you can see on those 3 variables it is a guess at best,
The first point is the key one.
If a lender offers a really low rate. But has a high SVR (Standard Variable Rate – the rate you will revert to if you do nothing after your initial product period). The APRC may come out higher, when in fact it could be cheaper for you to pay the lower rate now and ensure you switch after.
The SVR as a guide?
Also, the SVR isn’t even a good guide, as that changes whenever the lender feels like it.
A great example is Accord, they used to have a variable rate of 5.79%, but cut that to 4.99%, This because many people were put off their great products. This due to the APRC coming out high and freaking people out that their payments would treble at the end of their product period. When in reality, Accord have an excellent retention policy of offering new products when the deal ends (with no underwriting) or you can always switch anyway. So no-one actually pays that theoretical rate of 5.79%. In summary, you can’t trust APRC’s.
What impact does the type of mortgage product have on the rate?
Simply put – massive.
This is a key element when choosing a mortgage lender.
Again, in straightforward terms, the longer the product, the higher the rate. So, a 5-year fixed is often more expensive than a 2-year fixed rate.
The current market leading 2-year fixed rate is 1.05%, while the market leading 5-year fixed rate is 1.44%. Is the 2-year deal cheaper?
Tough one, as that depends on what happens to interest rates. IF, and this is a huge if, rates stay the same for the next 5 years, then yes, a 2-year deal would work out cheaper. But as money markets are very split on whether rates will go down before they go up, what represents best value?
What respresents best value?
There are many aspects such as – what is your risk appetite? What is your timeline? They will be the biggest factors in what is best for you aside from the rate charged.
Even if a 5-year deal presented best value, if you are planning on moving in 2 years, that doesn’t make sense. As you may have large exit fees to get out of the product, or be tied into the lender. The latter may not be an issue as long as you meet their lending criteria for the move. If not, you could be deemed a ‘mortgage prisoner’. As in, the lender is happy taking your money, but won’t let you move… yet another irony in our game.
There are other factors I haven’t even touched on, such as the level of flexibility you need in a mortgage. Do you want to link your savings (Offset)? Do you have a need to borrow more in a short space of time? and so on. These are all really important factors that will drive you to the right product/lender, not just the ‘cheapest’.
Should I be concerned about the financial stability of the lender I go with?
Again, in a word when choosing a mortgage lender – no! I would strongly suggest you read/watch Fight Club on this point.
Spoiler Alert – The purpose of the story is to blow up the HQ’s of the leading Credit Card companies, hence wiping out the debt and giving people a fresh slate to work from.
We don’t advocate that as sound financial planning, but in the extreme is does illustrate the point!
If a company goes bust, you owe them money, not the other way around! If you are talking savings and investments, completely different story, but we are talking debt here. Your terms are protected under contract law, and in practice, Northern Rock is a good example. The debt was nationalised and subsequently sold to Virgin Money. Ethics aside, that is the practice. So, should you worry about your lender’s stability? Not really. It isn’t a factor in our thinking as it will have no material impact on you.
Your next steps
As the above illustrates, when choosing a mortgage lender, it is a minefield out there. Brokers have 6 times the choice that you will have if you research yourself.
So if nothing else, sense check what you have been offered against what a broker has access to. There is no obligation and normally no fee for an initial consultation. You may well end up with a more suitable product which will save you more money or allow you to achieve what you want to.
Should you wish to speak to any of our advisers, please feel free to contact us today for a free initial, no obligation conversation. You can contact any of the team here , or schedule a call or consultation here.