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Mortgage Brokers

What are they - How they can help

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Page summary:
What are mortgage brokers and how can they help you? This page offers some answers as well as their advantages and disadvantages.
The right mortgage broker can be invaluable for finding the right loan at the best price. A broker defined by Wikipedia is -

'a party that mediates between a buyer and a seller'

We are the buyers and the mortgage lenders are the sellers, so a mortgage broker will be the middleman between the selection and transaction process.

They can therefore play an important role especially in the selection process when at any one time there are over 3,000 mortgages available on the market.

Don't feel daunted by the 3,000 figure because it's actually great news for us consumers as more products always means more competition and that normally leads to better and cheaper deals.

Plus, a significant proportion of the mortgages on the market won't be suitable for you, ie if you want a fixed rate deal then all trackers and variable mortgages are irrelevant to your needs. And that can eliminate over 50%+ of mortgages in one swoop.

Note - A mortgage broker and a mortgage advisor are the same.
The role of a mortgage broker

As the definition says above the mortgage broker's main role is to sort through all the different home loans and connect the buyer (us) with the seller (the mortgage lender). But they're also there to advise on the best products for our needs as well as guide us through the whole paperwork procedure from start to finish.

So if you find a broker you're happy with it's a good idea to keep their details on file as perhaps in a few years you'll want to remortgage or need some further advice. Think of him then as more of a mortgage advisor.

Mortgage Brokers - They're not all the same
When it comes to mortgages and finding the best deal, we want choice. It's therefore imperative that you choose a broker who can advise you on what's called the 'whole of the market'. As the name suggests it means they can sell virtually any mortgage on the market.
So before you start actively talking business with a broker it's a good idea to check on the following points -
  1. Are they 'tied' - 'tied' means they are associated with certain lenders and can only offer their products. For example, a mortgage specialist at Barclays will only offer Barclays products and no others and that's not a good thing as this cuts down on choice/price

  2. Can they offer 'whole of market' - means they can theoretically sell you any mortgage that's available and are not tied to any one lender or group of lenders

  3. How does the broker make its money - will the broker charge you a fee (less common) or will he receive a commission directly from the lender (far more common) - both have their merits (see below)

If a broker can offer you the 'whole of the market' then great, that's what you want because otherwise there might be deals on the market that are perfect for your needs but they can't sell or advise on them.

However, if a broker is tied I wouldn't always put the phone down on them, I'd at least hear what they have to say because you never know. Maybe for example they've got a hot offer which only they are selling and is up there with the current best mortgages on the market.

Paying your broker can be a good decision

Many people think that paying a broker for advice will automatically be more expensive than if the broker receives his commission from the lender.

It might for example be better value to pay a broker £500 in fees and get a much cheaper mortgage deal. Again, at least see how the fees and charges stack up between different mortgages.

So what is a reasonable fee to pay a broker?

  • Somewhere between £500 - £1,500, or
  • A percentage in the region of 0.5%-0.8% of the total loan value. But this can rise to 1.5% depending on the type of loan, if for example it is a complex deal

Finally, beware of any broker that tries to charge more than 1.5% as chances are they're trying it on.

What level of service does the broker offer

Before you commit to any broker it's important to get them to run through the whole mortgage process from start to finish.

Find out what information you need to provide (bank statements, proof of employment etc) and what the broker will actually be doing. For example, will they be making any recommendations, or just providing information.

And if it's your first mortgage will they help and guide you through the application process and be on hand to assist you all the way till completion?

Look for the 'Key Facts Illustration' document (KFI)

Lenders or brokers are supposed to furnish their clients with an important document called the Key Facts Illustration, or KFI for short.

This as its name suggests sets out the most important and relevant facts of a mortgage including stating the interest rate, the fees and the length of the mortgage loan.

Don't sign up to any mortgage deal unless you have this document. Also, be sure to keep it in your files after you've got the mortgage as that's good personal finance housekeeping.

Be wary of 'extras' some brokers try to push - They'll often use 'Scare marketing' tactics

In 2008 Which! the consumer magazine carried out a survey into mortgage brokers and found that 2/3rds of them tried to sell their clients add-ons, mainly all sorts of expensive and often unnecessary insurance policies.

If so I'd bet that many use scare marketing techniques to push them, for example -

'if you lose your job and don't have this or that insurance your home might get repossessed and you'll be thrown out on the street'

OK, that might be a bit too dramatic but you get the point. Don't fall for these tactics and instead try to use the mortgage broker for just that, a mortgage.

Tell them politely that if you're going to buy insurance you'll have to first research the market. See Secret 2 - Do your own research - it won't take long - which is one of this site's 10 Secrets to Good Personal Finance.

Chances are when you do this you'll be able to buy any insurance policy, if it's actually needed, at a 20% - 50% discount from the price the broker quotes.

Beware of lead generation websites

If you're using the internet to research mortgages be on the lookout for lead generation sites masquerading as mortgage brokers or help and information sites.

These will try hard to get you to fill in your personal details which will then be sold to the highest bidder and in my experience these are often the most suspect brokers.

Mortgage Broker Advantages
  • Access to the whole of market - 'whole of market' means a broker can sell virtually every mortgage available on the market

  • Qualified advice - Mortgage broker companies all to be regulated by the Financial Services Authority (FSA, the government's financial Policeman) and the individuals who offer advice have to pass certain exams relating to mortgages and finance in general

  • Can save you time - Maybe you're busy and so rely on a number of brokers to do the time consuming work and shift through the pluses and minuses of the different mortgage deals

  • Can save you money - using a broker will in most cases save people money. For example, if there are over 3,000 mortgages available at any one time how are you going to find the cheapest for your needs?

  • Special deals - Related to the above point. As brokers will sell many mortgages they're sometimes offered special deals by the lenders and these won't be available if you try to buy directly. This makes sense as a broker might sell 1,000s of mortgages per month
Mortgage Broker Disadvantages
  • Cut out the middleman - If you go through life always trying to cut out the middleman I don't believe you'll go far wrong as it usually means a cheaper product or service. This might be true if your mortgage needs are simple but if complex (perhaps you make good money but your salary is haphazard) it's still probably better to use a broker

  • Arranging a mortgage is expensive enough without somebody adding to the cost - True, most brokers don't charge fees, instead they receive a commission directly from the lender. But the lenders of this world are not charities so maybe you'll end up paying anyway. Perhaps for example the interest rate you've been quoted already includes a 0.05% premium and this is used to pay the broker

  • Suspect brokers - Who says the broker you'll use will actually be any good? They might for example push a weak product at the expense of a better one because the weaker one pays them the most commission. Obviously this does not always happen but it has been known. However, if you've got a basic education in the major points of mortgages you should easily be able to spot any suspect service or products, especially if you read our mortgage guide

  • Plenty of independent information published - Some argue you don't need to rely on a broker as all the information you need to learn about mortgages and how to get the right deal is published on websites, books, papers and magazines etc

  • Which! magazine survey (2008) - found plenty of holes and suspect practices with some mortgage brokers but again, if you've got a decent mortgage education this should cause little concern. Sadly it is the uneducated that tend to get preyed on. See Secret 1 - Financial education - a little goes a long way - which is one of this site's 10 Secrets to Good Personal Finance.
Buying Tactics - Tips & tricks

LearnMoney.co.uk comment :
Mortgage brokers on the whole are good news and can help us find and sign up to the right deal at the best price.

Yes, a Which! magazine survey showed some brokers might be suspect, but as I've said a number of times if you are educated in what you're buying and how brokers work (especially in relation to the charging of fees) you'll be fine.

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