With thousands of different products, the UK mortgage market is one of the most sophisticated in the world, and – consequently – potentially one of the most confusing. So if you’re in the market for a mortgage but don’t know your trackers from your flexible terms, a bit of advice might be useful.
“Not everyone needs mortgage advice,” suggests Thomas Reeh, chief executive of broker Black & White. “Some customers are financially savvy enough to find their own loan, but they are only a small minority.
“Even though more and more people are using the internet to point them in the right direction, the web, although a good source of information, is a poor source of knowledge. And the level of complexity, even on a standard loan, can be mind-boggling for most customers ever since regulation.”
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James Cotton of broker London & Country adds: “There are always some people who like to do this sort of thing for themselves. Then there are those who see a deal they like and are happy to go for it without any further advice. For most people, though, mortgage advice is very worthwhile to ensure they get the best deal possible.”
The quality of advice you get largely depends on which kind of adviser you choose to see; there are three main types:
- Tied agents work for banks, building societies and other providers of home loans. They can advise only on their employer’s mortgage products – so if you decide to talk to the adviser at Woolwich, for example, you will be given information only about Woolwich’s, or its associated companies’, mortgages.
- Mortgage advisers and brokers are independent of the lenders and can advise on a wide range of loans. Some work with a panel of lenders; others can recommend mortgages from across the entire home loan market.
- Independent financial advisers (IFAs) are qualified to give advice not just on mortgages but also on a range of financial products. Their recommendations are based on your individual circumstances and cover all the products available; they are legally obliged to find the most suitable products for you.
- It’s not enough just to know whether your chosen adviser is tied or independent, however. “If the broker works from a panel, you need to determine its scope,” advises Cotton. “Some work from a very limited panel, often as few as 10-15 lenders, while whole-of-market would be more like 130-140 lenders.”
find a mortgage adviser hereYou get what you pay for
It follows that if someone is surveying the entire financial market on your behalf, he or she is putting in a lot more work than someone recommending a single lender’s range of loans, so you should expect to face different payment structures, depending on your choice of adviser.
Advice from tied agents is free, as you might expect, mainly because it is information rather than advice. Advice from some brokers is also free; these brokers make their money through commission, which is paid by the lender whose mortgage is recommended to the borrower.
These advisers work from a panel of lenders, leading some to argue that this means the advice isn’t truly ‘independent’, because the adviser will naturally lean towards the lenders on his or her panel, whatever the borrower’s needs. Other brokers charge a flat fee for advice, which circumvents the issue of bias because these brokers generally cover the entire mortgage market.
“All brokers receive what’s called a procuration fee from lenders for placing the mortgage with a particular lender,” says Cotton. This is on average £428 per case, according to recent research by Mortgage Trust. “Some brokers also charge the borrower a flat fee for advice; many refund this to the customer if the mortgage goes ahead,” adds Cotton.
IFAs have to offer you a choice of how to pay: either by a flat fee or through commission paid to the IFA, or a combination of the two. Where you agree to pay a flat fee and the IFA is also paid commission, the commission is deducted from the fee charged to lower the borrower’s costs.
Advising the advisers
Before October 2004 mortgage advice wasn’t regulated, so technically anyone could provide home loan recommendations, and there was no comeback for borrowers if those recommendations turned out to be more in the adviser’s favour than the borrower’s. Now the FSA regulates all aspects of mortgage provision, including advice, and advisers are required to have a minimum standard of qualifications.
Regulation obliges mortgage advisers to follow set procedures about the information and documentation they provide. Breaching these procedures leaves the adviser open to fines, suspension of business and possibly even a prison sentence. FSA regulation also means badly advised borrowers may be able to claim compensation.
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“Everything should be disclosed in the initial disclosure document (IDD) once the borrower makes contact,” explains Cotton. “The IDD should set out the type of service on offer: advice and execution or information only. It should detail the size of the lending panel, whether the broker gets paid commission, whether the borrower has to pay a fee for the advice, and whether any of that fee is refundable. The IDD should be presented at the outset, but it doesn’t detail the broker’s qualifications – customers will have to ask. You can often find this on the broker/adviser company’s website, however, and you should be looking for at least the Certificate of Mortgage Advice and Practice (CeMAP).”
Some advisers might also present a ‘terms of reference’ letter at this stage, though this isn’t required by law. Once a specific mortgage is recommended, you should be given a key facts illustration (KFI), setting out the details of the loan – interest rate, mortgage term, early redemption penalties, and so on – plus any fees payable to the lender and adviser.
“The point of the KFI is to give borrowers something they can use to make comparisons between several different mortgages,” explains Rob Griffiths of the Association of Mortgage Intermediaries (AMI).
Added extras
Mortgage advisers often also sell related protection products, such as buildings and contents insurance, mortgage payment protection insurance (MPPI), critical illness and income replacement cover, and life insurance. You’re are not obliged to buy any of these products, though some mortgages may include them as part of a package, in which case you can’t get that particular mortgage without also taking on the tied insurance.
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“That’s another thing for customers to ask – the fact that an adviser sells mortgages from the entire market doesn’t necessarily mean that he or she sells all other financial products the same way,” notes Cotton – i.e. a broker may be tied when selling insurance products. “If the two sales techniques differ, this should be disclosed.” If you want independent advice on insurance products you may need to speak to an IFA.
