With an array of products on offer, the mortgage market can be a confusing place for prospective homebuyers – but taking advice may help sift through the trackers, fixed-rate and flexible loans to find the best deal for you.
About 70 per cent of borrowers take advice when choosing their mortgage, rather than going direct to the lender, says James Cotton of broker London & Country. This way they get expertise and somebody who can search a whole host of mortgages – and for some, such as the self-employed or those borrowing large sums, who can struggle to get a competitive rate, this is very useful.
For those struggling with black marks on their credit history, for example, advisers can arrange ‘self-certified’ loans, or even sub-prime mortgages for borrowers with county court judgments (CCJs) against them.
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Time-poor
But it is not just those in difficult circumstances who find advice useful. Buyers who are short of time and have neither the opportunity nor the inclination to search the market themselves can turn to advisers to do the legwork for them. Plus, some advisers may have access to deals not available in the open market.
Before approaching an adviser, you need an idea of your budget, or if you are remortgaging, make sure you have information on your current deal.
There are three main types of adviser, and the amount of the market they have access to and the quality of the advice will depend on which category they fall into:
c Tied or multi-tied agents: As their name suggests, they are obliged to recommend products only from specific banks, building societies, and/or home loan providers which employ them. This may just be one lender, for example if they only work for Halifax, or a multitude.
c Mortgage brokers: They can advise on a wide range of loans, either from a selection of lenders or across the whole market. A broker will charge a fee and/or receive a commission from the lender for arranging the mortgage on behalf of the borrower.
c Independent financial advisers (IFAs): They give advice on a range of financial products, not just the mortgage market. After finding out about your circumstances, they can search the whole of the market to find the best product for you.
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How much does advice cost?
Depending on the type of adviser you go to, you may face paying a fee. For example, while tied agents will not charge you, as they are offering information rather than advice, some brokers will – so check the terms before signing up.
Getting advice from a broker on the best deal can cost between nothing and hundreds of pounds. Brokers earn their crust through commission from the lender or by charging borrowers a fee, or from a combination of the two. Most lenders pay a commission to a broker for recommending their loans.
It is important that borrowers ask about how much commission is being paid, to make sure the broker is not simply recommending the lender paying the highest fee. Commissions typically vary from 0.35 per cent to 0.4 per cent.
Many brokers, such as Savills and Chase de Vere, charge clients a fee on top of the commission of about 1 per cent, and then rebate the commission. However, you can haggle over the fee at the outset.
If you go to an IFA, they will offer you a choice of payments – either a flat fee, commission paid to the IFA by the product provider, or a combination. If you choose a combination, any commission is deducted from the fee.
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What documents will you receive?
You can expect to be sent the following documents by your mortgage adviser:
c Initial Disclosure Document (IDD): This should be the first document received from an adviser, setting out the type of services they offer through a series of ticked boxes, such as the size of the home loan panel, whether they get paid commission, or if the borrower has to pay a fee. But it doesn’t detail the adviser’s qualifications, so make sure to ask for these, or check the website.
c Key Facts Illustration (KFI): This will be given once a mortgage is recommended, and will set out the key details of the loan, such as rate, term, if it has early redemption penalties, and any fees payable to the lender and adviser. It can be used to compare several different mortgages. It’s important to remember there’s more to a mortgage than the headline rate, and the KFI document is invaluable as it enables borrowers to contrast deals more easily – and find which offers the best value over the long-term, adds Carol Wright from Halifax.
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What else do advisers offer?
When you arrange a mortgage with an adviser, they may offer you various other products, such as life cover, buildings and contents insurance, mortgage payment protection insurance (MPPI) and critical illness cover. While occasionally these will be tied to the loan you take on, they will more often be added extras.
While ideally you would choose to be insured for every eventuality this comes at a cost, so your budget needs to be considered. Simple life insurance will typically be the cheapest form of cover – and is the only insurance offered by London & Country, for example, although it will refer you to an insurance broker for other products. Mortgage payment protection insurance (MPPI), also known as accident, sickness and unemployment cover, is more pricy as it pays out for more situations.
While mortgage providers are entitled to see proof that you have buildings insurance, other forms of insurance such as MPPI and life cover are down to the individual, says Wright.
However, if a broker covers the whole market for mortgages, it doesn’t mean they do the same for insurance. For independent advice on insurance products you should go to an IFA, or you can compare a range from brokers such as lifesearch.co.uk.
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Dealing with mortgage problems
If, for example, you find you can’t meet repayments, you should approach your lender directly rather than your adviser.
Borrowers should try and work out a solution with their lender, and the earlier they do this the more options there will be, says a spokesman for the Council of Mortgage Lenders (CML). But if they find the loan isn’t suited to their circumstances, or their situation changes, despite having all the key information disclosed to them at the time of completion they wouldn’t be entitled to compensation.
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Mortgage regulation
Since November 2004, the Financial Services Authority (FSA) has regulated all aspects of mortgage provision, including advice. This is good news for borrowers – as they will only deal with qualified advisers who are obliged to supply various documents so an informed decision can be reached. Before this date, anyone could offer home loan advice, and borrowers had no recourse to compensation if they were badly advised. Now, advisers could face fines, suspension of their business and even a prison sentence if they breach the new rules.
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Contacts
c London & Country:
www.lcplc.co.uk; 0800 953 0304
c Savills Private Finance:
www.spf.co.uk; 0870 900 7762
c Charcol online:
mortgageadvice@charcol.co.uk; 0800 358 5560
c Financial Services Authority:
www.fsa.gov.uk
c Council of Mortgage Lenders:
www.cml.org.uk; 0207 438 8956
c IFA Promotion (to find an IFA):
www.unbiased.co.uk
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What should you ask your adviser?
Your adviser should be asking all the right questions about your circumstances to offer the most suitable loan – but make sure you also have a few questions up your sleeve for them:
c Are you independent or tied to a single mortgage provider?
c What qualifications do you have? (They should at least have the Certificate of Mortgage Advice and Practice – CeMAP).
c Do you recommend loans from the whole of the market
, or a limited panel of lenders?
c If it is a panel, how many lenders does this cover?
c Do you charge a flat-rate fee or get commission from the lenders, or both?
c Exactly what fees and charges will I pay, and will they be to you or the lender? Are any of these refundable?
c What other financial products do you sell, and are you whole-of-market or do you only have access to a panel for these? Do you get commission for selling these?
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