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What is an Offset Mortgage and How Does it Work?

When you are looking at the best mortgage options, your whole financial picture should be taken into account to enable you to find the mortgage deal that works best for you. If you have savings but you do not want to directly use them for a deposit, another option you can consider is taking out an offset mortgage.

What is an offset mortgage and how does it work?

What is an offset mortgage?

An offset mortgage enables you to reduce your mortgage interest by linking your savings to your mortgage. Your savings remain in the savings account, but the amount is offset against your mortgage.

For example, you have £30,000 in a savings account and a mortgage of £200,000. The savings are offset against the mortgage, so you only pay interest on the £170,000 of the mortgage loan. This type of arrangement is able to save people money in some circumstances, where the interest rate of the mortgage is higher than the savings interest rate.

How does it work?

To be able to qualify for an offset mortgage, the applicant would be required to have savings that are held with the same provider as the mortgage. The savings stay in the account and are not used to pay off the mortgage, but the lender will not charge mortgage interest on the equivalent amount of the savings. This is instead of earning interest on your savings, as you choose to reduce the mortgage interest instead. Opting for an offset mortgage means that you can still access your savings if you need to.

Should you get an offset mortgage?

An offset mortgage suits some people but not everyone. In a lot of situations, an offset mortgage is used as an alternative to a guarantor mortgage, where a parent or guardian uses their savings to help children to get onto the property ladder. It allows parents to give their children financial help, while still being able to access their savings in the event that they need to.

Before deciding to take out an offset mortgage, it is important to evaluate the different mortgage options to calculate whether the offset option is more financially beneficial. There are only a few offset mortgage deals available on the market, so you will probably need to use a broker to find one that is right for you.

Your broker will also be able to use their knowledge and expertise of the mortgage market to identify whether an offset mortgage is the best option, or if you should take out a different type of mortgage.

Couple receiving advice on offset mortgages from a broker

Pros & cons of an offset mortgage

Pros

  • By opting for an offset mortgage, you can pay off your mortgage earlier or reduce the amount of the monthly payments.
  • You pay no tax on the interest that you save, which often provides savers with tax savings.
  • You can easily access the savings whenever you need to.
  • You could save more interest than you would be able to earn in a savings account.

Cons

  • Your savings will not be earning any interest over the term of the mortgage.
  • Your savings do not grow, so they will not be as useful as you might have originally planned, for example if you were planning on generating income from your savings.
  • There are not many offset mortgages on the market.
  • Some offset mortgages have higher interest rates than standard mortgages.

Overpaying your offset mortgage

Some providers will give you the option of overpaying your offset mortgage, which will help you to save interest but you will not usually be able to get that money back at a later date.

Who are offset mortgages suitable for?

Offset mortgages are generally a good option as an alternative to a guarantor mortgage, or an option for parents to help their children buy a property without needing to withdraw any of their savings. So, if having the option to be able to access savings is a priority, this could be the better option.

People who are looking to make tax savings can also benefit from choosing an offset mortgage instead of being charged the tax on their savings.

With savings rates being particularly low in recent years, offset mortgages can help savers to make the most of their money, by reducing mortgage interest rather than making interest on their savings.

As an example, if you had savings with an interest rate of 1% and your mortgage interest rate is 3%, you would be saving more than you could earn in interest on your savings.

To determine whether an offset mortgage is the right option, you can speak to an independent mortgage broker to find out whether it will be favourable to a different type of mortgage. An experienced broker will be able to take all of the relevant details such as the mortgage loan amount, savings amount, preferred term length, income and credit history to evaluate your options.

Offset mortgage advice from an independent broker

Boon Brokers is an experienced mortgage broker who can help you to find the most suitable type of mortgage. We can perform market comparisons to ensure that you are able to access the best type of mortgage to suit your circumstances and advise you on the advantages and disadvantages of each option.

Offset mortgages are not available from many lenders, but as a whole-of-market broker, Boon Brokers is able to find deals that are not directly available through lenders.

Contact us for free, impartial mortgage advice and we can help you to find the deal that will work out financially most beneficial to you over the mortgage term.

Equity Release Companies to Avoid

Equity release companies have historically had a bad reputation in the financial services sector, although not all equity release companies should be judged in the same way. While there are some companies who may be more profit-focused than customer-focused, you are definitely still able to find reputable equity release companies, if this type of financing is what you are looking for.

In this article, we summarise the different types of equity release options, describe how they work and explain who they are most suitable for depending on the applicant’s specific circumstances. We also look into the advantages and disadvantages of equity release and provide guidance on how to identify the companies you need to avoid.

Couple receiving advice on equity release

What is equity release?

Equity release is a financial product that enables homeowners to access money that comes from the equity in their property.

For example, if your property value is £250,000 and your outstanding mortgage amount is £50,000, you have £200,000 in equity.

Or, if you have paid off your mortgage and your property is worth £200,000, your equity in the property is the full value.

There are many lenders who will enable you to release equity in your property, so you can access the value in your property without the need to sell it and move out.

You are able to choose between a lump sum payment, regular payments or both, whichever option best suits your circumstances. The key benefit of choosing equity release compared to other types of financial solutions, is that it provides you with the opportunity to access your equity but you are not required to pay off the loan until you die or move into long-term care.

Types of equity release

There are two types of equity release:

Lifetime mortgage

The lifetime mortgage is a type of equity release where the property is still owned by the mortgage holder and the mortgage capital and interest is repaid either when the homeowner dies or goes into long-term care.

Typically, with a lifetime mortgage, you borrow up to 50% of the property value and are able to live in the property until you die, or the property is sold if you move into long-term care accommodation. This type of equity release is the most commonly used.

Home reversion

With this type of equity release, a percentage or the whole of the property is sold to the provider, and the person is able to continue living in the property. They are able to choose a lump sum payment, or regular payments and the provider receives the proceeds of their share when the property gets sold.

Equity release advice

Who is equity release available to?

Equity release is usually only available to people who are aged 55 or over (some products are only available for aged 60/65 and over) and who own their home outright or have very little left to pay on their mortgage. Many equity release providers will require that the property has a minimum value such as £70,000.

The lender may also take into account the condition of the property, as properties that will require expensive repairs or other work before being sold might not be accepted. In some cases, the lender could specify that repairs must be completed before they agree to the equity release.

How does it work?

If you match the criteria for an equity release loan and your application is approved, you will have your property valued to determine how much the lender will be prepared to lend to you. Generally, you will be able to borrow between 18% and 50% of the total value of the property.

The older you are, the higher amount of loan the lender is likely to be prepared to lend to you. Once you have been approved and the loan sum is confirmed, you can decide whether you want to take the full amount in one lump sum, or if you would prefer to receive regular payments instead, or a combination of the two.

Some people choose to have around half of the money as a lump sum and then the remainder as regular payments and most lenders will be quite flexible with how you want to arrange the payments.

Your preferred payment method will depend on what you want to use the money for, some people want to buy a holiday home with a lump sum, for example, while others may want an amount each year to pay for a holiday, or regular payments to cover living expenses.

No monthly repayments will be required during the term of the loan, unless you choose to make payments to help reduce the amount of interest that is owed at the point that the property is sold.

Whether you sell the whole property to the lender, or a percentage of it, the capital, plus the interest accrued over the term will be paid using the profits of selling the property, which happens either when you die or move into long-term care accommodation.

How do I set up equity release?

Equity release products are not as common as standard mortgages, so the best option to find a lender will usually be to work with a broker who is experienced in arranging equity release products, such as Boon Brokers. The broker will be able to check your eligibility for an equity release product and find the most suitable lender for your circumstances.

Equity release broker

How much does it cost? What do costs include?

Just like with a standard mortgage loan, there a number of different costs included in arranging equity release, including:

  • Valuation fees
  • Arrangement fee
  • Legal fees
  • Financial advice fees (with Boon Brokers, advice is free of charge)
  • Completion fee

The costs will vary depending on the lender and solicitor that you use but the costs will amount to around £3,000 upwards. Then the other type of cost you need to consider is the interest that will be charged for the product.

One of the main disadvantages of this type of financial product is that there is no set overall cost. Interest continues to accumulate until the property is sold when you die or move into long-term care, which will not have a specific date. So, the interest costs could spiral to a very large amount, as the interest is compounded, as opposed to interest staying the same amount over a set period, as it does with a standard type of loan.

Some people choose to pay off interest, so that they can keep the interest down, to protect inheritance from being significantly reduced due to the compounded interest.

Are equity release schemes safe?

Equity release providers are regulated by the Financial Conduct Authority and most lenders are members of the Equity Release Council. If you are considering taking out equity release, you should check that the lender is a member of the Equity Release Council, to give you added security. The benefit of being regulated by the FCA is that if someone is mis-sold an equity release product, they would be able to claim compensation.

Most lenders will also provide a no-negative equity guarantee, which protects them from owing more than the total sale price of the property. Historically, being in a negative-equity situation was one of the main concerns for this type of financial product.

Advantages of equity release

There are many reasons that people opt for equity release over other types of financial products, including:

Tax-free cash

Equity release can provide you with a regular income that is tax-free. Unlike leaving inheritance, the money from equity release is tax-free. So, for some people, equity release is a way to provide their children with some financial help without waiting until they die and without the inheritance being taxed.

It is recommended that you seek tax advice before you agree on a product, as some options will incur income tax, depending on how much you are drawing down each year.

No monthly repayments (unless you want to)

One of the key reasons that people opt for equity release is that they will not have to commit to any monthly repayments, as the interest and capital is all paid later on, when the property is sold.

This option allows you to get a loan without worrying about whether you will be able to make the monthly repayments along with any other regular outgoings you have. Normally, to take out a large loan amount you would be required to pay substantial monthly repayments, so equity release avoids this significant financial commitment.

Equity release advisor

You can stay in your home

When you consider the different options that are available, you might consider selling your property and downsizing, to free up a cash sum. However, this option might not suit your situation, as you would ideally like to stay in your home.

Moving home can be a big upheaval and a stressful process, with lots of work involved to pack up your belongings and get moved into a new place. Then you also have the hassle of searching for a new property, paying for solicitors and valuations, as well as the possibility of a property purchase falling through if there is an issue with the property in the survey, or if another house sale in the chain falls through.

With equity release, you are able to stay in the property until you die, so you will never have to worry about moving home and trying to find another suitable property. Your current home might be in the location that you want to stay living in, with good neighbours and friends nearby and if you move, you could lose those connections.

Fixed interest rates

Equity release loans will usually have a fixed interest rate, which will typically be somewhere between 3% and 6%. With a standard mortgage loan, the rates can change in line with the Bank of England base rate, so you do not know what interest you will be paying over the full term of the mortgage.

Potential disadvantages

As with the majority of financial product options, there are potential disadvantages to be aware of, in addition to the advantages. The key disadvantages you should take into consideration are:

Negative equity

Getting into the position of negative equity is a concern but most companies will provide a no-negative-equity guarantee, so it is important to make sure the lender you choose to go with does this. Without the guarantee, if you did fall into a position where there is negative equity, then you (or your estate) could owe money even after your property is sold.

Income tax implications

Depending on what type of equity release payment arrangement you choose, your income tax liability could be affected, so it is important to get professional tax advice to ensure you do not end up owing more tax than expected, or risk not being aware of the tax implications. The amount that you choose to draw down could result in income tax liability changes, so you should understand how the different amount options will impact you from a tax perspective.

Loss of means-tested benefits

Another financial implication to be aware of, is that people who are entitled to means-tested benefits could lose their benefits, due to the income they are receiving from the equity release. This is another reason that it is really important to discuss your personal finances with an expert who can advise whether means-tested benefits will be affected by taking out an equity release product.

Broker explaining the advantages and disadvantages of equity release

Loss of Inheritance

The amount of inheritance to pass onto family members can be reduced, as when the property gets sold, there will be a number of factors that determine how much is left in inheritance, such as the property value, how much loan was taken out and the interest accumulated. Some equity release products give you the option to ringfence a certain amount of money as inheritance, which is worth considering if you are worried about your beneficiaries losing some of their inheritance.

Equity release companies to avoid and how to find a good lender

While many lenders are trustworthy and will work in line with their client’s best interests, there are also some less trustworthy people out there who will try and profit from other people’s lack of knowledge of the financial options available. Therefore, deciding on a lender is a very important decision and you should take the following into consideration:

Are they registered with FCA? Members of ERC?

The first step to finding a good lender is to ensure that they are registered with the FCA and that they are also a member of the Equity Release Council. This means that they are regulated and that you will be more protected than if you borrowed from a lender that is not. You are at risk of being mis-sold a product without any rights to compensation, if you do not go with a FCA registered lender.

Lenders who are members of the Equity Release Council will offer:

  • A no negative equity guarantee.
  • Capped or fixed interest rates.
  • Sensible, competitive interest rates.
  • Sensible early settlement fee structures.
  • The right to remain in your property for life.
  • The right to move to another property.

One of the issues that some people find when they take out an equity release product, is that they are unable to move to another property. Even if you do not think you will want to move property, it is important to have that option, as your circumstances may change over the term of the loan.

What are the costs?

The costs will vary between different lenders, but each lender should be able to provide you with a breakdown of the costs, so you can compare the different options. This is where using a broker can be really helpful, as they can compare the different options available on the market for you and explain the calculations to find the most suitable product for your circumstances.

Are there any early repayment charges? If so, how much?

Some companies have high early repayment charges, so this is another important consideration before taking out a product.

Offering loans before knowing your circumstances?

Another big red flag is if a company offers you a large loan sum, without having collated the information regarding your circumstances and specific financial situation. If they offer you a large sum before you have provided them with much information, you should definitely be wary of them.

Equity release alternatives

Alternatives to equity release

Before opting for equity release, you should consider all of the different options that are available to you, to make sure that it is the best financial solution for your specific situation and your priorities. The other types of financial options available are:

Remortgaging

Instead of taking out an equity release loan, you might want to consider remortgaging your property to release the equity in it. The downside to this is that the mortgage loan will need to be repaid as monthly payments, so if that is the main aspect that you are trying to avoid, equity release could be a more suitable option.

However, if you have an income that is able to cover the monthly repayments of a remortgage, this option will help to ensure that you know how much inheritance you will be able to leave to your beneficiaries.

Selling assets

If you have some valuable assets other than your home, it could be worth considering selling them. This could be jewellery, a vehicle, equipment or anything else of value. You might have sentimental items that you were reluctant to sell but when you evaluate whether it is a better option than an equity release loan, you may decide this is a more suitable choice.

If you are a retired couple with two cars, you could consider selling one of them and sharing a car to get a lump sum plus the savings in running costs. Maybe you have shares that you could sell, these are all types of assets that you could think about selling rather than committing to taking out any type of financial commitment.

Downsizing

One of the most common ways for retirement aged people to free up some money and reduce their outgoings, is to sell their existing property and buy a smaller property that costs less. For example, if you are living in the family property and your children have grown up and moved out, you probably do not need as big a house anymore.
You could downsize from a 3/4-bedroom property to a 1/2-bedroom property and have access to the profits made from the sale, minus the cost of the new property.

Downsizing also generally means you will have less maintenance and upkeep, such as gardening, cleaning, painting etc. and have less wear and tear to the property. As well as thinking about your position now, you need to consider what could happen in 10 or 15 years’ time. You might be fit and active now and the upkeep of the property is easily manageable but that might not be the case in the future. You might also need to consider factors such as whether a bungalow may be more suitable to live in when you are older and cannot manage the stairs.

One of the major disadvantages of downsizing is that you will need to go through the process of moving home, looking for a new property and all of the work involved in buying a property such as valuation, survey, solicitor searches etc. You may also be very happy with the location of your existing property and want to stay in the neighbourhood that you are familiar with.

Couple meeting with an equity release broker

Is equity release right for you?

The key to making the decision that is right for you, is to decide what your top priorities are. Do you want to avoid making monthly repayments and want to stay in your home for as long as you want to? Or do you want to make sure that your beneficiaries do not miss out on any possible inheritance? Also, do you have any alternative options to equity release that you would be happy with?

Deciding whether equity release is right for you is a choice that should be very carefully considered, taking trustworthy, impartial advice from a reliable broker such as Boon Brokers.

Boon Brokers are members of the Equity Release Council and, unlike most brokers, do not charge any client fees at any stage of the advice and arrangement process. Crucially, Boon Brokers also has whole-of-market access to lenders in the United Kingdom. We can help you to review your existing financial position and identify all of the available options, to find the most suitable product or solution.

Contact us today for free independent equity release advice.

How Does Life Insurance Work?

You probably know that it is a good idea to take out life insurance, but have you been wondering how it actually works and how it protects your family? In this article, we provide an overview of life insurance and the different types of policies that are available, so you can decide whether you need insurance and which type policy best suits your circumstances.

What is life insurance?

Life insurance involves paying a monthly payment each month for an insurance policy so that your beneficiaries will receive financial payments in the event of your death. You can arrange for their payment to be a lump sum, or regular payments, whichever option will be most beneficial to them and the financial situation.

If you have children, or a spouse who would financially struggle if you die, taking out life insurance can help to ensure that they have financial support after you are no longer able to provide an income.

Woman meeting with life insurance broker

There are two main types of life insurance:

Term life insurance policies

With this type of life insurance, the policy runs over a set term, which could be 5, 10 or 25 years, for example. The payout will only be payable if you die within the term of the policy.

There are two different types of term life insurance:

Level term life insurance

If you choose level term life insurance, the amount of the sum assured remains the same throughout the policy. As an example, you could agree a sum assured for £150,000 and this would not change. This type of policy normally provides a surplus for the beneficiaries to enjoy after any mortgage balance is paid off. This is because the mortgage balance will reduce over time but the life cover sum will remain the same.

Decreasing term life insurance

With this type of cover, the further into the term you die, the lower the pay out will be. This type of policy is usually selected to provide protection to redeem your mortgage balance alone upon death. However, unlike level term insurance, there is unlikely to be any surplus leftover after the mortgage has been redeemed.

Taking this type of policy out should mean that there are no concerns about your family losing the house, as the mortgage payments would still get paid off.

Whole-of-life policy

With this type of policy, it is a guaranteed pay out regardless of what date you die, as long as you continue to make the payments for the policy. This type of policy will usually cost significantly more than a term policy.

Man receiving life insurance advice

How much does life insurance cost?

The cost of life insurance depends on a number of different factors, including:

Age

One of the most significant factors is the age of the life insurance policy holder, with premiums being higher for older people. If you start paying for life insurance at the age of 40, the premiums will usually be less than for the same policy if you start paying when you are 45.

Health and family medical history

Insurers will also take into account any pre-existing medical conditions that could deem you to be at higher risk of death. You may also be asked whether there are any members of your family who have a history of a serious medical condition, as this can increase the risk that you will also be affected by the same condition.

Lifestyle

When you apply for life insurance, you will be asked a number of questions related to your lifestyle, such as how much alcohol you drink, whether you smoke (and how much) and your weight. Drinking more alcohol, smoking and being overweight will all affect the price of your policy.

Occupation

People with jobs that are in the higher risk category will also usually need to pay a higher premium for their life insurance. A high-risk job in the construction sector would usually increase premiums, compared to a low-risk job such as office-based roles. If you have any high-risk hobbies, this can also push your premium up.

Amount and length of cover

Longer term and whole-of-life policies will usually cost more than the shorter-term policies, as there is a greater chance of the insurance company being required to pay out and for paying more money out.

How much cover should you take out?

Deciding how much cover to take out is a very important consideration that needs to be carefully calculated. You should spend time to list all of the financial commitments that your family will have and the period of time those commitments will exist for. For example, the number of years left to pay the mortgage off on the house, any loans that have been taken out, financial support for children’s education and the general living expenses including bills.

If your main priority is to ensure the mortgage is paid off for your partner and that there is adequate financial support for your children until they are 21, you then calculate how much will cover all of the relevant costs to cover those.

You would also look at the full financial picture for your family, such as whether your partner has a stable job and their income level, how many years your children are away from full-time employment, as well as any savings and pensions that could be used.

Another consideration that you might want to cover is paying off funeral costs, so that your family are not faced with the financial burden of that, in addition to the grief of losing you.

If you want to keep your premiums to a minimum, taking out the shortest length of term that will work for you will keep the costs down, so you might just want to work out the best option to ensure your family has the minimum financial help that they need, rather than paying more.

Couple meeting with life insurance advisor

How long should the cover last?

Again, this should be calculated based around the important costs that you want to make sure are going to be covered. For some people, taking out insurance for a 10-year term will ensure that the outstanding mortgage is paid off and after that, there should not be many other large costs to pay out for, so a 10-term will suit their family’s financial situation.

However, if there are lots of financial dependencies, for example, you have young children and want to make sure that they have financial support, even as they get older, you would be better taking out a whole-of-life policy. You will need to weigh up whether paying the higher insurance premiums is a better option than starting up a savings account for your children or helping to get them set up with a property.

What does life insurance cover? What isn’t covered?

Life insurance will usually only cover death, although there are some types of policy that cover being diagnosed with a terminal illness. Certain types of causes of death can be excluded in life insurance policies, for example, deaths that have resulted from drugs or alcohol abuse. High risk sports may also be excluded.

When you initially take out the policy, if you have any medical conditions that could mean you are at higher risk of a premature death, the insurer may decide that death from this health condition is excluded in the terms and conditions of your policy.

It is very important that you answer all of the insurer’s questions accurately and correctly, as any mistruth could be investigated and your insurance could be invalidated as a consequence, meaning that your family could be in a position where they do not get any financial support from your life insurance.

The types of questions you will be asked when you are getting a policy quote include:

  • Height
  • Weight
  • Date of birth
  • How much alcohol you drink
  • Whether you smoke and how many cigarettes per day
  • Medical history
  • Family medical history
  • How much exercise you do
  • Occupation
  • Hobbies
  • Financial information such as annual income.

Most life insurance providers will request that you have a medical examination to check for any existing medical conditions that could affect your life expectancy. Some conditions may result in the insurer declining to offer you a policy, or they could exclude the condition in the terms of your policy, so your family would not receive the money if that is your cause of death.

Choosing a life insurance policy

Can I name who the money goes to when I pass away?

Yes, when you take out a life insurance policy, you can name the beneficiary who you want the money to go to. If you take out a joint life insurance policy that pays out on 1st death, the money will go to the other policyholder.

How to choose a life insurance policy

There are a lot of different factors to consider when you are choosing a life insurance policy. Firstly, deciding on the right length of term to suit your family’s financial circumstances is the starting point. If you have any pre-existing medical conditions, then you should be looking for insurers that specialise in policies for people with medical conditions.

Before you take out any life insurance, you should check whether your employer provides a death in service policy. You are usually able to name a beneficiary to receive a pay out that is a multiple of your salary, if you die while you are still employed by them.

Affordability is another big influence in the type of insurance that you take out. In an ideal world, you take out the most comprehensive insurance to pay out the biggest sum of money possible. However, the more cover you have, the more you are going to be paying for it, so you will need to decide how much you are prepared to pay for your policy premium.

Other types of insurance

Life insurance can provide financial security for your family but there are other types of insurance that you might want to consider taking out:

Critical illness cover

If you were to get ill and were unable to work, your life insurance policy will generally not provide you with a payout in this situation.

If you are ill for numerous years, with no income then this is likely to cause you significant financial problems, so if you have a young family and a mortgage, taking out critical illness insurance will ensure that you can pay your mortgage if you were to get a serious illness. However, be cautious of Critical Illness policies as they may not cover all types of critical illnesses.

Accident, sickness & unemployment insurance (ASU)

Another risk for you and your family is that you could lose your job through redundancy and would not be able to afford your mortgage payments until you were able to find another job. ASU insurance will cover you in the event that you lose your job through redundancy or accident/sickness covers either 1 or 2 years of each claim up to a maximum of £1,500 per month.

Income protection benefit

Income protection benefit will provide a monthly benefit amount, normally until retirement, in the event of a loss of earnings through accident or illness. The maximum cover allowed is 80% of the net income. The premium cost will largely depend on age, amount of benefit, deferred period and occupation.

Who does not need life insurance?

Generally, people who have no dependents would not take out life insurance. If a person’s partner could afford to pay the mortgage on their own, then there is also less reason to take out life insurance but it is entirely up to individual whether they want to protect someone they love by taking out life insurance.

Meeting with insurance policy advisor

Putting your insurance in trust

Another idea that you might want to consider is whether to put your life insurance in trust, which is the way that will be easiest for your family to deal with when you die. Putting it in trust means your insurance is ring-fenced outside of your other assets. It also means that the payments should be excluded from inheritance tax.

For many people, taking out life insurance provides them with the peace of mind that their family will not face financial difficulty in the event of their death. The policy may never need to get paid out because the policyholder lives longer than the term of the insurance policy but having that safety net means they do not have to worry about how their family would cope without them.

When a parent of a young family passes away and they are the main earner, if they do not have an insurance policy in place, their family will have to face financial struggles in addition to the emotional stress of losing their loved one. So, taking out life insurance, even if it may never be required, is the best way to prevent that situation from happening.

If you would like any advice on life insurance and the different options that would be most suitable for your family’s circumstances, contact our team for a free consultation.

What is a Guarantor Mortgage and How Does it Work?

Getting onto the property ladder is never particularly easy but with unemployment rates increasing and major economic uncertainty, lenders have significantly tightened lending criteria. For many people, this means that they have had to put their dreams of buying their own home on hold for a while.

Guarantor mortgages

However, there are alternative solutions available to help people to buy property, including government schemes and arrangements such as guarantor mortgages.

What is a guarantor mortgage?

A guarantor mortgage is where another person, such as a relative, becomes a guarantor, agreeing to make the mortgage payments in the event that the person buying the property is unable to. This means that there is less risk for the mortgage lender, as the guarantor will have checks to confirm that they are reliable with making financial payments.

Typically, a guarantor mortgage will be the best option for someone who has had a mortgage application declined due to having an adverse credit history, or not having enough credit history to provide evidence to lenders that they are reliable at making credit payments.

The guarantor is required to sign legal documents that confirm that they will pay the monthly mortgage payment if, for any reason, the homeowner does not. While they will not appear on the property deeds (in the case of most guarantor mortgage types), they are legally bound to make the payments if required.

Guarantor mortgages are only offered by a select number of lenders and after the outbreak of COVID-19, some lenders removed this product from the market, so there are even fewer available now. However, a mortgage broker such as Boon Brokers, who is a whole-of-market broker, may be able to find you a guarantor mortgage (or a suitable alternative), if this is the type of mortgage you require.

First time buyers looking for a mortgage

Types of guarantor mortgages

There are a few different types of guarantor mortgage:

Savings as security

With this type of guarantor mortgage, the family member or friend will deposit an amount of their savings into a special savings account to use this as the security. Usually, the amount will be between 5-20% of the property price and it acts like a deposit. Once a certain amount of the mortgage has been paid off, the guarantor can take their money back.

If any payments on the mortgage are missed, the mortgage lender is able to access funds from the savings account to pay the owed payments. In some of these types of guarantor mortgage, the savings can earn interest, although the rates would be considerably less generous than a standard savings account.

Property as security

Instead of using savings as the security, there is also the possibility of using property owned by the guarantor as security. This involves a high element of risk for the guarantor, as the lender could take legal action to get the property repossessed if mortgage payments are missed on the mortgage that they are a guarantor for.

Joint mortgages and JBSP mortgages

Another solution for someone to buy a property is for their parent or another person to agree to have a joint mortgage which means that the property deeds are in joint names. This could be with a parent, or it could be with a friend or partner who will also live in the property. Having two incomes on the application can help to get it approved, compared to being based on just one income.

However, one of the drawbacks of this type of mortgage is that if the other person already owns a property, they will be required to pay the second property stamp duty charge, which can be very expensive.

A JBSP (Joint Borrower, Sole Proprietor) is similar in that the mortgage is joint between the guarantor and the buyer, but only the buyer’s name will be on the deeds. This means that the guarantor will not be subject to the stamp duty surcharge.

Who are guarantor mortgages suitable for?

Couple with mortgage broker

Guarantor mortgages are suitable for people who are unable to buy a property themselves because they do not match the criteria required from a lender for a standard mortgage. This could be because:

  • They have no deposit, or not enough deposit.
  • They have a bad credit score.
  • They are on a low income.
  • They have little, or no credit history.

The main dependency is that they have someone that is willing to act as a guarantor for them and who will match the criteria required for a guarantor in terms of their credit score, savings amount or property equity.

A guarantor will usually be a parent helping their child to get a mortgage or another close family member, such as a grandparent.

Benefits for first time buyers

It can be difficult for first time buyers to buy property, especially when a minimum of 5% deposit is now required from many mortgage lenders. For people who want to buy their first property, if they do not have a deposit, or they do not have any credit (because they have not had a credit card or other type of credit), this is one of the only options.

The alternative options are the government schemes such as Help to Buy: Equity Loan and Help to Buy: Shared Ownership (we provide more details on these at the end of the article). Choosing a guarantor allows the ownership to stay with the buyer and their guarantor, rather than sharing ownership with a housing association.

Who can be a guarantor?

Some lenders specify that the guarantor must be a close family member, rather than a friend or aunt/uncle, for example. The guarantor must be able to provide the relevant type of security for the mortgage type, such as savings or property with equity. The guarantor must also have a good credit rating, as this will be checked as part of the application process.

Generally, as long as the security is in place, it will not matter if the guarantor is retired, although each lender’s criteria is different. Some may require that they have paid at least 50% off their own property mortgage.

Parent acting as mortgage guarantor

Who is responsible?

In the first instance, the property buyer should pay the mortgage payment each month but in the event that they are unable to, the guarantor is legally responsible for paying it instead.

In the situation where the guarantor is unable to make the payment, whatever has been secured as part of the mortgage would then be at risk. So, that could be that savings are used to pay the mortgage or even that their own property is repossessed to generate funds to pay the outstanding mortgage payments.

In some cases, the lender will insist that the guarantor is named as a joint applicant, to help to reduce the risk of a payment being missed because the joint applicant will be more involved in the mortgage.

Costs for guarantor mortgage

Compared to a standard mortgage, the interest rates will often be higher for a guarantor mortgage and there are less deals available on the mortgage market. This could also include arrangement fees, which could have been avoided if there were more mortgage deal options.

If the guarantor is required to pay a second property stamp duty surcharge, then the costs of this will be higher. Usually, they will need to pay an extra 3% surcharge on top of any SDLT (Stamp Duty Land Tax) that is applicable.

Repaying a guarantor mortgage

Another option under a guarantor mortgage is to guarantee part of the mortgage, rather than all of it. For example, they could guarantee above 75% of the property value. In this case, the homebuyer may still need to put down some of the deposit.

Repayments work in the same way as a standard mortgage, in terms of monthly payments to pay the interest and capital. As long as each payment is met, the mortgage will run smoothly, but the guarantor must be fully aware of their financial responsibilities in the event that payments are missed.

Couple repaying mortgage

Risks of being a guarantor

Even if you think someone will be a reliable mortgage payer, circumstances can change. If the buyer were to lose their job or become ill and cannot work, or their relationship breaks down (if they are cohabiting and sharing bills), this could affect their ability to make the repayments.

Other factors such as applying for loans or other types of credit could also affect their ability to make their monthly payments, if they cannot afford to pay all of their outgoing bills. They might not lose their job but could have their hours reduced, resulting in lower salary, so any guarantor must consider all of these risks before signing any legal documents.

Non-payment of the mortgage repayments will also affect the guarantor’s credit record but even if the mortgage payments are made, a guarantor mortgage connects your credit record to the other person, so a missed payment on another loan or bill could harm your credit rating too.

How to get a guarantor mortgage

There are not many guarantor mortgages available on the current market but a mortgage broker with access to whole-of-market deals is your best chance of finding one and ensuring it is one that best suits your needs.

Since the beginning of the COVID-19 outbreak, lenders have withdrawn many types of mortgage deals as the economic uncertainty and rising rates of unemployment present a higher risk for lending than pre-COVID-19.

Speaking to a broker such as Boon Brokers will help you to determine whether a guarantor mortgage will be a suitable option and whether it is likely that you will meet the criteria.

Alternatives to a guarantor mortgage

If you are unable to get approved for a guarantor mortgage, it is not the last option because you could still be able to buy your own property using Help to Buy or Shared Ownership. With the Shared Ownership scheme, you buy a percentage of the property, usually between 25% and 75%, so you are only required to obtain a mortgage for that value and the deposit will be lower.

With Help to Buy Equity Loan, you buy a new property and take out an equity loan for up to 20% of the property (up to 40% is available in London). With both of these types of schemes, you are able to eventually own the whole property, as long as you agree to that option when you arrange the mortgage and purchase.

Conclusion

With no 100% mortgages available and stricter lending criteria as a result of the COVID-19 pandemic, many people are struggling to buy their own property if they do not meet the criteria. One option is to wait and save for a bigger deposit, or to try to improve their credit rating, if these are the factors that are preventing them from having their mortgage approved.

The next best option for people who have a willing parent or relative, is the guarantor mortgage that will allow them to get onto the property ladder and then once they have paid off a certain amount, the guarantor is able to come off the mortgage.

If you are interested in applying for a guarantor mortgage, or any other type of mortgage, Boon Brokers can help you to review your choices and advise what the best financial solution will be based on your circumstances.

Buying a House Post-Lockdown: What You Need to Know in 2021

The process of buying a house is complicated at any point in time but with the effects that COVID-19 and Brexit have had on the property industry, there are even more factors that impact purchasing a property in 2021.

In this article, we analyse how the pandemic has influenced the property market and mortgage applications, as well as highlighting other important information and recent changes to be aware of if you are planning on buying a house post-lockdown.

What you need to know about buying a house post-lockdown

What will happen to house prices in 2021?

Many property experts predicted a house price crash after the initial mini-boom after the first lockdown in the UK. However, the anticipation of a crash was short-lived, as the government’s stamp duty holiday boosted house sales, with buyers keen to take advantage of the temporary removal of stamp duty tax.

Unlike during the first lockdown, house sales and moves have still been allowed in the second lockdown, so the property market has been able to continue operating, despite working around some restrictions to comply with lockdown rules.

This means that there will not be a repeat of the mini-boom that happened after the first lockdown, when there was a flurry of house sales going through after months of lockdown restrictions preventing sales.

The end of the stamp duty holiday

What is likely to influence the house sales and prices, however, is the stamp duty holiday coming to an end on 31 March 2021.

Since 8 July 2020, home movers buying property priced at up to £500,000 were able to benefit from paying zero stamp duty tax, potentially saving up to £15,000 on the purchase. With this government initiative ending at the end of March, many estate agents are expecting an influx of sales to get pushed through before the deadline, followed by a slower period for sales.

The average house price grew month on month from May to December 2020 but in January 2021, house prices have fallen 0.3% from the previous month, according to Halifax. However, despite this fall, house prices are approximately £13,000 higher on average than they were 12 months earlier. House prices could still see significant fluctuation over the next few months, due to the rush to push sales through before the stamp duty tax holiday ends.

After 31 March 2021, it is widely expected that house price growth will slow down with predictions varying between a fall of 1-5% based on the views from some of the top property experts, including mortgage lenders and estate agents.

Unemployment rates set to rise

As furlough schemes end and unemployment rates increase, as expected in the aftermath of the COVID-19 pandemic, this is also likely to have a big influence on house prices over the next year at least. With higher levels of unemployment, there are more people who are unable to afford their mortgage payments and also lower numbers of people being approved for mortgages.

This could result in more properties being available on the market, which would then reduce the average asking prices due to the lower demand. It is very difficult to predict the full impact of the coronavirus on the economy, especially so early into the vaccination programme roll-out but mortgage lenders have already tightened their lending criteria.

With the UK having been technically in a recession since August 2020, lenders have had to adjust their criteria to limit their lending risk, with a projected increase in job redundancies as companies struggle to operate after the furlough scheme ends.

How can I check my eligibility for a mortgage?

The number of mortgages available on the market has halved since the beginning of the COVID-19 pandemic. This means that it is more difficult to get a good deal but there are still plenty of mortgages available if you meet the criteria.

Lenders will be focusing more on job stability than prior to the pandemic, as well as the other factors such as annual income, existing debt and credit history when deciding whether to lend to you, or how much to lend to you.

If you apply for a mortgage and it gets declined, this can show up on your credit report and affect your future application for a mortgage or other types of loans or credit. Therefore, it is better to check your eligibility before you apply for a mortgage. The eligibility criteria differs from one lender to another but generally, the criteria will include that you have a good credit history and have been a UK resident for at least 3 years.

Couple working out their mortgage eligibility

How to check your eligibility:

Check your credit report

One of the first actions to take is to check your credit report to see if there are any issues that you were not aware of. If you have any recent missed payments, this can result in a declined mortgage application, so improving your credit score should be a priority.

This involves making sure that you are on the electoral roll and that you have made all of your recent payments. Reducing the amount of outstanding debt that you have will also help to improve your credit score and therefore help your chances of having your mortgage application approved.

Online mortgage calculators

You should also be able to get an idea of whether you will be able to get a mortgage approved based on your current salary, by using an online mortgage calculator and answering some questions about your income and outgoings.

Get a soft credit check by a broker

To check your eligibility for a mortgage, you can also ask a broker such as Boon Brokers to conduct a soft credit check, which will run a series of checks without leaving a trace on your credit report. This means it will not affect your future mortgage or credit applications, but you will still find out whether you are eligible for the mortgage deals you are interested in applying for. Getting a Mortgage in Principle will help you to understand how much you are likely to be able to borrow.

Advice for first time buyers in 2021

If you are buying a house for the first time, the process might be quite daunting and confusing, especially with some of the financial jargon used by mortgage lenders and constantly changing schemes and initiatives. Here are some tips for first time buyers in 2021:

Do not rush into a purchase

If you are trying to take advantage of the stamp duty holiday or are simply keen to get moved quickly, it can be tempting to rush into a mortgage application and house purchase. With the economy so turbulent and job stability lower than usual, it is more important than ever to take your time and research everything about your mortgage and the property you want to buy before you commit to anything.

Get your finances into shape

Clearing any outstanding credit cards, closing unused bank accounts and making sure that you do not miss any payments leading up to your application will improve your credit score and lenders will see you as a more trustworthy borrower. If you are able to, save up a higher deposit. The bigger deposit you have, the more likely you may be to qualify for the better deals with lower interest rates.

Seek expert advice

Understanding the mortgage market is not straightforward and with so many different mortgage deals on the market, it is difficult to find the one that best suits your specific needs and circumstances. By working with a broker, you can access more deals, as well as benefit from their knowledge of the current mortgage market to find the most suitable deal for you.

Seek expert advice from a mortgage broker

Find out about government schemes

If you cannot afford a mortgage for the full property price or you do not have a deposit saved up, there are some options available to help first time buyers to get onto the property ladder. Make sure you know what is available to you, such as these government schemes:

Help to Buy Equity Loan Scheme

This scheme is available for first-time buyers who want to buy a new build property. It allows you to borrow 20% of the purchase price with no interest to pay on the 20% for the first five years.

Right to Buy

Tenants who rent their home from the council may qualify under the Right to Buy scheme, which can enable them to purchase the property, usually at a significantly lower price than the property value.

Shared Ownership

Another scheme that helps people to get onto the property ladder is shared ownership, where you own a percentage of the property and rent the rest from the housing association or council. You can later buy a bigger share in the property when you can afford to do so.

Conclusion

Buying your first home should be an exciting time but also a time where you need to proceed with caution and make the right choices regarding which property to buy and what sort of mortgage deal to select. Hopefully this article has helped you to understand some of the key considerations for buying a property in 2021.

Call Boon Brokers for free impartial advice on applying for a mortgage.

What Is a Mortgage in Principle?

If you are looking to purchase a property in the near future, then you may need a mortgage in principle (MIP), or decision/agreement in principle, as it is sometimes referred to as. In this article, we explain what a MIP is and why you might want one or be required to obtain one.

Mortgage in principle

What is a mortgage in principle / agreement in principle?

A mortgage in principle is confirmation from a mortgage lender stating how much they are prepared to lend to you, subject to the checks that they will perform if you decide to proceed with the mortgage application.

Some estate agents will request to see a MIP as evidence that you have been approved for a mortgage amount to cover the value of the property that you are interested in buying and may not agree to a property viewing unless you provide one. Agents and sellers are more likely to take you seriously if you have a MIP. So, if there is a lot of interest in the properties you are looking at, a MIP can give you the edge over other people that are interested in the property.

Your offer may be more likely to get accepted if the seller is confident that the sale will not fall through because you have confirmation a lender will give you a mortgage for the amount required, in principle.

Getting a MIP is a good idea if you are not sure how much you will be able to borrow from a lender. Historically, the amount a lender would agree to lend would be based on a simple calculation, such as 4x the applicant’s salary. Now lenders take many other factors into account when they decide whether to lend to the applicant and to determine how much they are prepared to lend. For example, credit history, outstanding debt and other outgoings the applicant is committed to, will be factored into the assessment.

How reliable is it?

While obtaining a MIP will give you a good idea of how much you can borrow, it is not guaranteed that you will actually be able to borrow up to the agreed amount. At the MIP stage, a lender conducts a credit check. This means that the lender can verify your expenditure and identify any adverse credit (defaults, late payments, CCJs or Bankruptcies). Based on the declared income and verified financial commitments, an MIP can show your maximum mortgage available. However, once an application is submitted, other factors may affect the loan sum available to you such as changes to lending criteria, a down-valuation to your property to mortgage, etc.

How to get a mortgage in principle

You should be able to get a mortgage in principle quite quickly when you request one from a lender or broker. If you have all of the required information, you may be able to get an instant MIP based on the information you provide.

What you need when applying

When you are applying for a mortgage in principle, you do not typically need to provide as much paperwork as you do for a mortgage application. For example, documents like bank statements are rarely requested at MIP stage. Lenders and brokers should request income proof, ID and Address Verification documents for all applicants to maintain their compliance with the Financial Conduct Authority.

Recent payslips are typically requested from employed applicants and the last 2 years of Tax Calculations and Tax Year Overview documents are typically requested from self-employed applicants as income proof. For ID Verification, an in-date passport or driving license document is sufficient. For Address Verification, a recent utility/ council tax bill or bank statement showing current address is sufficient.

Couple applying for a mortgage in principle

How long does it last?

A MIP will usually last for between 30 and 90 days, but again this will be specified by the lender, so if you think you will need it to last longer than 30 days, make sure you choose a lender who will supply one that lasts for a longer period.

Questions you’ll be asked

When you apply for a mortgage in principle, you will be asked a set of questions to enable the lender to calculate how much they would be happy to lend to you. These questions will usually include details such as:

  • current salary and employment status
  • credit history
  • address history
  • current credit commitments and other outgoings

You may also be asked about the approximate property cost you are thinking of buying and how much deposit you will have for the mortgage.

Will you go through a credit check?

Lenders will either conduct a soft or hard credit search on your credit file following a MIP application. This is so that the lender can verify your declared financial commitments and compare them to your credit file. The purpose of this is to increase the reliability of the MIP issued in the attempt to provide an accurate maximum loan sum available.

A soft footprint does not leave a mark on your credit file, unlike a hard footprint that leaves a trail. If you are keen to avoid hard footprints, inform your broker and they will act accordingly. However, as long as there are not repeated searches on your credit file over a short period of time, credit footprints should not significantly damage your credit file.

Mortgage advisor

What happens once you have a MIP?

Once you have your MIP you will have a clearer idea of the price range of houses you are likely to be able to get a mortgage approved for. This means you can start your property search, or if you have already found a property you are interested in, you can arrange a viewing and put in an offer on a property that you want if you are at that stage.

If the seller accepts the offer, the next step is to get started with the mortgage application, including appointing a solicitor and getting your paperwork sent to the lender.

The lender will conduct a hard credit check as part of the mortgage application process.

Can I get a MIP from Boon Brokers?

Boon Brokers has a whole-of-market access to mortgage lenders in the U.K. Our purpose is to find our clients the best mortgage deals for their specific circumstances. As part of our service, we will arrange a MIP to enable prospective homeowners to start their journey of finding the most suitable mortgage for their new home.

We take the stress out of the mortgage process for our clients by arranging the Affordability, Agreement in Principle and ultimately the Mortgage Application when the client is ready.

Call us today to arrange a free phone or video consultation with one of our fee-free brokers to discuss your requirements further.

Mortgage Broker Fees: The 2021 UK Definitive Guide

By choosing to work with a mortgage broker to find your mortgage deal, you can benefit from their in-depth expertise in the market, which can help to find you the best mortgage deal available to suit your specific circumstances.

Whether you need to use a specialist broker due to having adverse credit or any other circumstances that standard mortgages are not suitable for, or you just want to find the best financial mortgage deal, a broker will help with this.

There are many different brokers available to choose from, but they do not all offer the same level of service and the pricing structures can vary significantly.

In this guide, we provide a comprehensive review of the mortgage broker fees across the market, answering some of the most frequent questions about the subject of mortgage brokers.

After reading this guide, you should be able to decide which type of mortgage broker is more suitable for your budget and to match you with the right deal for your requirements.

What fees do mortgage brokers charge?

The pricing models from one broker to the next can be very different, so you should ask about, or research, the costs before you agree to use your mortgage broker and you should ask for their prices in writing.

These are the different pricing models that brokers operate with:

Fee-free

Some mortgage brokers do not charge any fees at all to the mortgage applicants, as they make their money from charging commission to the mortgage lenders instead. This means that you get their service without any cost to yourself, which will be very welcome when you are paying fees for solicitors and other costs associated with buying a property and moving house.

Hourly rate

There are also some brokers that will charge by the hour, where costs can quickly escalate if there are any complications that they need to spend more time on. You should try to get an estimate of how many hours they are going to charge you for, as this should be fairly standard.

Fixed charge

Brokers with a fixed charge provide a more transparent approach to their fees but you will still need to make sure that there are not going to be any further costs that are not included in the initial quote. Typically, a fixed fee mortgage broker cost will range between £300-£600, with the average cost in the UK currently sitting at £500, according to the Money Advice Service. This is backed up by recent research we undertook with mortgage brokers across the UK, which revealed that the average amount charged was £559, but with some brokers charging more than £1,000. This fee may be charged upfront or on completion of the mortgage transaction.

Percentage

With this model, the broker charges a percentage of the mortgage that the applicant is taking out. Therefore, with higher value properties you could end up paying a lot more than the average mortgage broker fee. For example, if you are taking out a mortgage for £250,000 and they are charging 1%, you will be paying them £2,500, which is significantly higher than the average mortgage broker cost.

Combination

There are also a number of brokers who will use a combination of these models, for example, they might charge you an hourly rate and then also get commission from the lender. However, it is worth noting that all mortgage brokers receive the commission from the lender. This means that any client fee charged will be in additional income for the broker.

Mortgage broker fees or commission – which is better?

There is not a simple yes or no answer to this question, as it all depends on the quality of your mortgage broker.

According to our recent research, 59% of mortgage brokers across the UK charge fees, therefore most mortgage brokers do charge fees for advice.

However, the price that each mortgage broker charges does not always correlate to the level of service that you will receive.

There are some excellent mortgage brokers that will charge fixed client fees, just like there are some exceptional brokers that operate by not charging the client a penny.

To keep your costs down, the ideal option is to find a reputable broker that will not charge you any costs for their services. At Boon Brokers, we’re proud to offer an exceptional service without any cost to the mortgage applicant.

A good way of finding out whether your mortgage broker is of high quality is to research any feedback and reviews provided by previous clients through a third-party review site such as Trust Pilot.

Sometimes the best approach to deciding on your mortgage broker is to talk to the advisor that you will be working with to see whether you get on with them and trust them to provide you with the best advice.

You don’t want to appoint someone and then feel that they are difficult to work with or are not putting your best interests first. Your gut feeling might just steer you away from a broker that isn’t going to deliver a good level of service.

You should also make sure that any broker that you select is authorised and regulated by the FCA (Financial Conduct Authority), either through a network or directly, as this will provide you with protection if you are given poor mortgage advice.

Is fee-free mortgage advice too good to be true?

When you are provided with something for free, the natural instinct is to wonder whether it is too good to be true.

Of course you would prefer to pay no costs but if the reality is that you are using a poor broker, you could end up worse off financially than if you paid a fee and used a better broker.

However, due to the fact that brokers can operate on a commission basis through the lender, mortgage brokers such as Boon Brokers can give you the highest level of service without incurring you any costs.

Typically, brokers that apply costs will do this because they have large overheads such as employee salaries and office costs to pay for.

At Boon Brokers, business operation costs are kept to a minimum by utilising cutting edge technology that reduces the cost of running the business.

There really isn’t a catch when it comes to fee-free brokers, but as we mentioned previously, you really do need to be confident in the quality of the service that the broker will deliver.

When you are looking at the different broker options available to you, you should be looking for brokers that offer whole-of-market access. This means that they have access to every lender on the market, so they can find the best possible deal available to suit your needs. The survey we at Boon Brokers conducted* found there was a general lack of understanding around what mortgage brokers can or should offer. Worryingly, one in seven of those who have used a mortgage broker didn’t know if they had whole of market access.

You should remember that the financial implication of obtaining a mortgage deal with a better interest rate can be very significant. Over a 25 or 30-year term, even a small percentage of difference could end up costing you thousands of pounds more or less over the full term.

However, you can move to a new mortgage deal once your fixed rate ends, so this is another factor to consider when you are thinking about whether to go with a fee-free broker or one with a charge.

If you are paying an additional £500 or more every two or three years when you switch mortgages, you are going to end up paying a huge amount in mortgage broker costs.

This is why it is a good idea to try and find a high-quality fee-free broker that you trust, so you can go back to each time you want to find a new mortgage deal.

How much commission do mortgage brokers receive?

Typically, a broker will be paid around 0.35% of the mortgage loan size as commission from the lender. So, for a £100,000 loan, this would calculate at £350, or for a £200,000 loan, they would be receiving £700. The lender will benefit from providing a larger loan, so it makes sense for them to give the broker a higher fee for the work that they do in arranging the mortgage.

However, for the mortgage applicant, the mortgage broker will not be doing more work (If any) to find a good deal on a £200,000 loan compared to a £100,000 one for the same applicant. Therefore, they cannot justify charging you a percentage of the loan.

Mortgage commission is a topic that has been heavily scrutinised in the past by regulators, with concerns that high commission fees can lead to brokers recommending specific products that might not offer the best deal to their clients.  Research Boon Brokers undertook with 2,000 mortgage holders showed that 13% of people worry a broker will push you into a deal they want you to take because they get better commission*.

However, if the commission was completely removed then it could lead to brokers charging high fees for their services, so this is another reason to make sure the broker you choose is regulated by the FCA.

Is a mortgage broker fee worth the money?

In many cases, using a broker will enable the mortgage applicant to get a mortgage deal that they couldn’t find on the market themselves.

With a lower interest rate deal, mortgage applicants can quickly recoup the £500 that they pay on their broker costs. Usually, the deals a broker can find are much better than the ones you will find with a high street lender, so financially, working with a reasonably priced broker can definitely be worth the money.

However, that isn’t taking into consideration that there are numerous brokers who will find you the best mortgage deals on the market, saving you a large amount of money, while providing that service for free.

If you are planning on going with a broker that charges a fee, you need to look at how their fee stacks up against the savings that you will make by using them, to determine whether they are worth the fee or not.

You should also ask your broker why they apply a charge in addition to the commission, as this will also indicate whether it is worthwhile paying that fee or not.

One broker can go above and beyond what is expected, doing all of the work for you, while other brokers might do the bare minimum of work for their fee.

You should ask the broker what their fee covers before you agree to work with them, so you will know what you are getting for your money. There is a lot of paperwork and other admin tasks involved in arranging a mortgage deal, which can be really time consuming, so choosing a broker that is going to do a lot of the work for you will definitely be a big advantage.

A good mortgage broker will be able to identify the best mortgage deal to suit your circumstances but they should also be able to make the process much smoother.

They will know which lenders will provide a loan to you and for how much, by assessing the information that you provide them with. The better knowledge they have of the mortgage market, the quicker and easier the application process should be for the applicant.

A mortgage broker should also be able to advise the applicant on the requirements of the lender, for example, which documentation they will request.

If they already know what each lender will require from you, before the lender asks for it, this will significantly speed up the process.

If you want the mortgage application to go through quickly, so that you don’t miss out on a property, then this type of insight will come in very useful.

Your broker should have exclusive access to the best deals on the market, deals that you would not be able to get hold of if you were looking directly for lenders. They might have worked with specific lenders for years and agreed a special type of deal that will save you a large amount of money.

What you want from your broker is vast knowledge about the market, as well as their guidance and support to get your mortgage processed as smoothly as possible.

Again, taking a look at reviews of each broker you are considering using, will help you to get a better idea of how much work and effort your broker will provide in order to save you a lot of the hard work.

The reviews on sites such as Trust Pilot should also show you how easy it is to get hold of your broker, as this can be a very frustrating part of the mortgage application process; not being able to ask questions when you need to can hold up the application.

If a client has been unable to contact their broker when they’ve needed to, there is a good chance that they will mention that in their review. You should ask your broker what their working hours are and the best way to contact them.

If you’d like to learn further about choosing the perfect mortgage broker for you, please see our article.

How many homebuyers use a mortgage broker?

Despite the fact a good mortgage broker is likely to be able to find homeowners a much better product than they could secure themselves, well over a third of mortgage holders (39 per cent) have never used one.

We conducted an independent survey of almost 2,000 mortgage holders* to ask how many had used a mortgage broker when securing a mortgage in the past. We discovered that on average 39 per cent of homeowners had never used one, but the number rose to half (49 per cent) of over 55s. This means many homeowners could have reached full ownership of their property – having now paid off their mortgage – without ever having had professional advice to help them secure the best deal. Over a lifetime of mortgage payments that potentially means they’ve been paying out thousands of pounds on unnecessary interest and fees.

 

Younger homeowners are more likely to consult an expert, with three out of four (74 per cent) of 25 to 34s saying they have used a broker for a home loan.

Regionally, those in the South East and Wales are most likely to have used a mortgage broker, whereas those in Northern Ireland, Central England and Scotland are least likely. Edinburgh was the city where people were least likely to have consulted a broker, followed by Belfast and Norwich. Southampton was the city where homeowners were more likely to have taken advice from an expert, followed by Manchester and London.

Conclusion

Buying a property is usually the biggest outlay that you will ever have and as well as the price of the property, there are many additional costs such as mortgage arrangement fees, interest fees, solicitors’ fees, valuation fees etc.

Therefore, you should be as financially savvy as possible and the more expertise and help you have with your mortgage application process, the better chance you will have of getting the right deal for your specific requirements.

If there are any factors such as poor credit history, or you are self-employed or any other reason that makes it harder to get a standard mortgage, a broker will be the best option for finding deals for your situation.

You shouldn’t get put off with the idea that a free service means is a lower quality service, because brokers like Boon Brokers can give you the best level of service but make their money by charging the lender rather than the mortgage applicant.

However, you should do enough research about the broker to find out whether they are going to be the best option for you. A broker that has many years of experience working in the industry will be able to save you a considerable amount of money because they will know exactly which deal works out best financially, so you should take your time in selecting one.

If you want to save yourself some money then you should select a broker that has a fee-free model but make sure you don’t just pick any fee-free broker, find out as much information about them as you can. Recommendations from friends, online reviews and other online research will help you to form an idea of whether a broker has a good reputation, or if you should stay well clear.

What Is a Fixed Rate Mortgage and How Does It Work?

When you are looking to take out a mortgage for the first time, you will soon discover that there are a number of different types of mortgages to choose from and it is important to understand the differences, so you can identify which option is the best one for your circumstances.

New homes

What is a fixed rate mortgage?

A fixed rate mortgage is a product type that remains at the same interest rate throughout the agreed period. This compares to a variable rate mortgage, which is one that can fluctuate. For example, a tracker mortgage interest rate increases or decreases in line with the Bank of England base rate.

One of the key advantages of having a fixed rate mortgage is that there will be no unexpected increases and it is therefore easier to plan your finances and make sure that you can afford the monthly payments.

Fixed vs variable rate

With a variable tracker mortgage, if the Bank of England base rate was to increase by 1%, the mortgage interest rate would also increase by 1%, which could take the payment above your monthly affordability. For this reason, many mortgage applicants prefer the security of a fixed rate mortgage so they know exactly what they need to pay each month for the remainder of the term.

People who need to have more flexibility with selling properties in the short-term, for example, if they move around a lot through their job or simply do not want the commitment of staying in the same property for a set period, are often better opting for a variable rate. This is because there are rarely any early repayment charges attached to variable rate mortgage products.

What are the different types of fixed rate mortgage?

The different types of fixed rate mortgages are defined by the length of time they are fixed for, with the most common product term options being: 2-year, 3-year, 5-year and 10-year.

What happens when your fixed rate mortgage ends?

With the 2-year fixed rate, you have an initial period of two years where the interest stays the same and at the end of the initial period, it will usually revert to a standard variable rate. There may be the option to switch to a new mortgage with a fixed rate again if you meet the most suitable lender’s lending criteria. When the fixed rate mortgage ends, moving to the standard variable mortgage can involve a significant increase in the amount of the monthly payment, so this is when most people will find a better mortgage deal to switch to.

Pros and cons of fixed rate mortgages

There are several pros and cons of taking out a mortgage on a fixed rate. The main factor to consider is whether your circumstances are likely to change within the near future. When you agree to a fixed rate mortgage, there will usually be a significant penalty if you end the mortgage within the fixed rate period (known as an early repayment charge or ERC).

This penalty will often be that you pay a percentage of the overall mortgage loan as a penalty, if for any reason you redeem the mortgage early. For example, you might decide to sell your property for a number of reasons. Circumstances can easily change such as a relationship breakup, a change of job or being made redundant, which might leave you with no choice but to sell your property.

With a variable rate mortgage, you may not need to pay an early repayment charge but you are likely to pay a much higher amount in interest payments.

Mortgage advice - fixed rate or variable

Which is better, shorter or longer fixed rate terms?

If you were to take out a 10-year fixed rate mortgage, you would be required to pay an early repayment fee if you sold the property within those ten years and redeemed the mortgage. This is why more people opt for the shorter length of period, such as 2-year or 3-year, so there is less risk of having to pay the penalty fee.

When people opt for a 10-year fixed rate, it will usually be at a time where the Bank of England base rate is low and therefore locking into a low fixed rate for a long time is beneficial. They will be fairly confident that they will still want to keep the same property in ten years’ time or they will have the option to move their mortgage to a new property.

There is a risk associated with taking out the longer 5-year and 10-year fixed rate mortgages that you will miss out on significant savings if the Bank of England base rate reduces and better mortgage rates become available, but you are tied into your long-term fixed period.

To get the cheapest interest rate, opting for a 2-year fixed rate will be significantly less than a 10-year fixed rate. When the Bank of England base rate is particularly low, you will find that there are less long-term fixed rate deals available, as mortgage lenders see this as a risk of losing money if the rates go up again.

How do the early repayment charges work?

In the example of a 5-year fixed rate, the ERC will often start off at 5% of the outstanding loan balance and with each year that follows, it will reduce by a further 1%. Therefore, ending the mortgage after four years will incur a considerably lower penalty charge than ending it after one year.

Mortgage lenders do this so that they do not lose money, as most of the work that they do is at the beginning of the mortgage, where the administration activity such as processing and completing checks etc. happens. The longer that the mortgage holder has the mortgage, the more money the lender makes from the interest, so they want people to keep their mortgage for at least a couple of years to make it profitable enough for them.

Can you make overpayments?

Another benefit of choosing a fixed rate mortgage is that you are often able to overpay on your mortgage, which will allow you to save money over the length of the mortgage term, as you will reduce the amount of outstanding interest. You might not be in a position to overpay at the beginning of your mortgage but having the option to do so later, is a good flexibility to have. Lenders will typically allow overpayments of up to 10% of the amount outstanding per annum without any early repayment charge.

First time buyers choosing a mortgage

Is a fixed rate mortgage right for you?

Whether a fixed rate mortgage is the right option depends entirely on your circumstances and what your future plans hold. People who know that they definitely like the property and the area it is located in and are confident that their circumstances (like job security and relationship status) won’t change, are more likely to benefit from a fixed rate mortgage.

The fixed rate mortgage deals are often considerably cheaper in terms of interest rates than variable, so by sacrificing flexibility, you are benefitting in savings. However, if there is a chance that your situation will change, maybe your job security is not very high, or you are in a relationship that is not very stable, then a fixed rate mortgage could end up causing you a lot of inconvenience.

In the event that you were to lose your job and would be unable to make your mortgage payments, you might not have any other choice but to sell your house, in which case you would need to pay any applicable early repayment charge.

To give you an idea of how much this could cost, on an outstanding mortgage loan of £200,000 a 5% ERC would be £10,000, so this is potentially a very large fee and a big risk to take.

In the scenario where you took out a joint mortgage and then the relationship ended, there would be a number of possible outcomes. One person on the mortgage could re-mortgage into their sole name and pay half of any equity to the other person, or the house would be sold, and any equity split. In either case, the early repayment charge would need to be paid, which could cost the two people £5,000 each for the ERC when it is taken out of the calculations.

So, there are many different scenarios where a fixed rate mortgage could be the wrong decision but by choosing a shorter fixed rate length, you reduce the risk and reduce the percentage that you would get charged.

If there is a possibility that you might want to move to another property in the near future, e.g. you are planning to start a family and will need more space, then you should make sure that you have a portable mortgage. This means that if you want to move house during your fixed rate period, you are able to move the mortgage over to the new property without incurring any early repayment charge, although the mortgage affordability would have to be recalculated.

The other factor to consider is the existing mortgage market and currently (at the start of 2021), due to the COVID-19 health pandemic, interest rates are at a comparably low level to one or two years ago for those who have over 20% equity/deposit. This means that being fixed to a low rate for a longer period of time could be very financially beneficial to people who are happy to get tied in. Whereas, the opposite applies for those with less than a 20% deposit/equity. Due to the significant risks associated with lending during the pandemic, the high risk mortgage applications at the higher loan-to-value brackets are currently seeing interest rates increase.

Boon Brokers offers impartial mortgage advice to enable you to make an informed decision regarding which type of mortgage to take out and if you opt for a fixed rate, we can help you to choose the length of initial period that is most suitable for your circumstances and future plans. The best part is that we do not charge any client fees for our advice or arrangement mortgage services. We are paid a commission directly by the lender on completion of the transaction.

Call us today to discuss your mortgage requirements and we will be happy to help.

How To Choose a Mortgage Broker: The Essential 2021 Guide

There are many different reasons that mortgage applicants can benefit from using a mortgage broker, from saving money to helping them find the right mortgage deal to suit their specific circumstances. In this guide, we take a comprehensive look into the services that mortgage brokers provide, as well as the numerous benefits of choosing to work with a broker.


 

In this article

What is a mortgage broker?
Why use a mortgage broker?
Why is it a good idea to get advice from a mortgage broker?
Risks of getting no advice
When to see a mortgage broker
What types of mortgage brokers are there
Mortgage broker fees and commissions
Key questions to ask a mortgage broker
How to choose a mortgage broker?
Your rights when using a mortgage broker
What to look for in a mortgage deal
Conclusion
Jargon Buster


 

What is a mortgage broker?

A mortgage broker is an intermediary that helps to match mortgage applicants to the right type of mortgage lender and deal for their circumstances. The broker will often charge a fee to the applicant, or to the lender, or both to pay for their role in the mortgage arrangement process.

In return for that fee, the broker will provide the mortgage applicant with expert advice, which can be particularly useful if the applicant has special circumstances that require specialist advice that a standard lender would be unable to provide.

A mortgage broker will usually be able to access a larger selection of different mortgage deals than a mortgage borrower would be able to find without their help. The mortgage broker will also have a really in-depth knowledge of the mortgage market, meaning that they can quickly identify suitable deals, saving the applicant a great deal of time trying to research the deals and speak to different lenders.


Mortgage brokers

Why use a mortgage broker?

One of the key reasons for using a mortgage broker is utilising their expert knowledge to find you the most suitable mortgage deal. The difference between taking out one mortgage deal compared to another can be enormous in terms of the overall costs. A mortgage broker will be able to find a mortgage deal that offers the best financial solution for their client, using their knowledge of the market.

Mortgage borrowers who have special circumstances, for example, adverse credit often choose to use a mortgage broker so that they can find a lender that will be suitable for their situation. Instead of approaching standard lenders and having an application declined, the specialist broker will know exactly which lenders will be able to provide them with a mortgage. Because brokers regularly work with a range of lenders, they get to understand the preferences and criteria of each one, which helps in finding the right one for a client’s situation.

Other special circumstances where an applicant might choose a specialist mortgage broker is when they are self-employed and providing payslips to prove income is not an option. There are numerous lenders that specialise in providing mortgage loans to self-employed workers and brokers can link their clients up with them.

handshake mortgage broker

Dealing through a mortgage broker also speeds the process up. Buying a property and all of the work involved in getting a mortgage, working with solicitors etc. can take a long time and if a mortgage takes too long to go through, you could potentially lose out on buying your property. Brokers have software that enables them to quickly find deals that match the borrower’s criteria, this is much quicker than doing other types of searches for mortgage deals. The mortgage broker takes a lot of the hassle out of finding a mortgage, reducing tasks like paperwork and speaking to different lenders, which can be very time-consuming.

Using all of the information that lenders use to determine whether they will lend to a borrower, the mortgage broker will be able to identify the best options and present them to the borrower. A declined mortgage application can affect the applicant’s credit report, so using a broker that will find the right mortgage lender will avoid that possibility. The mortgage broker factors every detail into the search, such as credit report, loan amount, LTV (Loan-to-Value), income, employment, and any other information that lenders use.

The financial aspect of calculating whether one mortgage deal is a better deal than another is not straightforward, so working with a broker to use their expertise can help to ensure that any deal works out financially beneficial compared to others.

calculating mortgage deal

Mortgage brokers should be regulated by the FCA and therefore this protects the borrower by providing an option for them to escalate complaints if something goes wrong. When you are looking for a broker, you can check whether they are authorised by the FCA to ensure you are protected.

Why is it a good idea to get advice from a mortgage broker?

The advice that brokers are able to provide is really valuable in choosing the best mortgage. Most mortgage brokers will have been working in the industry for a long time and will have a team of experienced mortgage advisors that know everything there is to know about the mortgage market.

Every mortgage borrower has a unique set of circumstances which suits a certain type of lender, the job of the broker is to match those unique circumstances to the most appropriate lender. The brokers can explain in detail how a specific lender is the best option, based on the borrower’s finances and situation.

Giving advice mortgage broker

Due to working in the mortgage industry for years, mortgage brokers will have access to a huge selection of lenders and some mortgage brokers offer whole-of-market services, or in other words, access to every single mortgage lender available.

Since the Mortgage Market Review in 2014, the mortgage industry has become more tightly regulated. The affordability checks are now tighter, which means that some borrowers find it harder to get a mortgage deal, or cannot lend as much as they would like to. This is to protect both the borrower and the lender and the broker will be able to conduct a full assessment of your affordability to find out which deals you will be eligible for.

Risks of getting no advice

Mortgages are complex and there are many different factors that influence the type of deal that is best for the borrower. Without the advice of knowledgeable mortgage broker, the borrower is at risk of paying more for a mortgage than they need to. Non-mortgage experts are unable to analyse the options in the detail that a broker is able to, so the borrower could end up paying a higher interest rate, or getting tied into a deal with a high early repayment charge or other disadvantages that could have been avoided.

A mortgage is usually the biggest financial purchase that a person will ever make, so seeking professional advice makes good sense to make sure that your decision on your mortgage deal is an informed one and all of the options have been carefully considered.

Risk of no advice

Another big risk that a borrower will face if they do not work with a broker is not being able to complain that they have been provided with an unsuitable mortgage, as they have selected the mortgage lender themselves without taking any advice.

When to see a mortgage broker?

If you are thinking about taking out a mortgage or looking to remortgage, then a mortgage broker can help you to assess the best options that are available to you. A broker can provide you with expert advice to help you make one of the biggest financial decisions in your life. Instead of doing all of the research yourself, if you talk to a mortgage broker about your requirements and finances, they will be able to advise you on the mortgage or remortgage process and find the best deals.

What types of mortgage brokers are there?

There are three main types of broker, some only offer a limited set of deals, some are tied to specific lenders and others are whole-of-market brokers. There are some brokers that say they are whole-of-market, but they won’t check the deals that are direct only, so it is important to find out which lenders the mortgage brokers will check on your behalf. You may also want to check direct mortgage deals that are missed by brokers.

what types of mortgage brokers

Mortgage broker fees and commissions

The broker may charge you a fee for their services, or they may just apply a fee to the lender.
The average mortgage broker fee will be around £500 but different brokers work in different ways, some will apply a fixed fee, others charge for their time at an hourly rate, there are also brokers that charge based on a percentage of your mortgage.

Brokers such as Boon Brokers do not charge the mortgage borrower and they receive commission from the lender instead. Then you also have brokers that will charge both the lender and the borrower a fee. It is important to find out what charges the broker will apply, if any. The mortgage broker must be clear about their fees to their clients under the requirements of the FCA and borrowers must be aware of unethical mortgage brokers that are not clear about their fees.

Key questions to ask a mortgage broker

When you are choosing a mortgage broker, there are some key questions that will help you to ascertain whether they are the best one to suit your needs. These questions include:

Are you whole-of-market?

If your mortgage broker is whole-of-market they will have access to all of the available mortgage deals on the market, so they are more likely to find you the best deal.

Will you tell me about mortgages that are only available directly from lenders?

If you don’t ask them this question, then they probably won’t tell you whether or not they check the deals that are directly from lenders. So, make sure you ask this question, as you could be missing out on deals that are only offered direct from the lender.

lenders fees

What are your fees and charges?

As explained in the earlier section, mortgage brokers operate differently in regard to their fees. They should tell you exactly what they will charge, whether that is a flat fee, a percentage of your mortgage or whether they charge a commission to the lender. You should be able to find a good, reputable mortgage broker that will not charge you any fees for their service, as they will get paid by the lender instead.

What is included in the service you offer? Will you handle all admin and chase lenders?

One of the main advantages of using a broker is that they will take on the legwork like the admin elements and also do the chasing of lenders on your behalf. When you are deciding which broker to work with, clarify what services they offer and see how much of this work they will be prepared to do for you. Some mortgage brokers only offer the very minimal, whilst others will do as much as they possibly can for you.

When will you be available?

This is another critical question, especially if you want to get your mortgage in place relatively soon. Don’t assume that the broker will be able to start working on your mortgage search straight away, as they could have a lot of other clients that they are working for and therefore you could be waiting some time to get started with finding a mortgage deal.

mortgage broker availability

How to choose a mortgage broker?

The main factors that you should consider are whether they are a whole-of-market broker like Boon Brokers, and also look at details such as whether they charge any fees and what sort of reputation and experience they have. If you ask all of the questions listed above, then this should give you a better idea of the service they will provide.
Some mortgage brokers operate with a web-based service only, so you should also decide whether you are happy to work on that basis, or if you prefer being able to talk to someone face-to-face about your mortgage details.

A good way to see whether a broker provides good service is to check any customer reviews that have been provided. Brokers will probably have testimonials on their websites from happy customers, but this does not give the full picture, as they will cherry-pick the best testimonials to upload onto their website.
reviews
Finding independent reviews on sites like Google will give you a more accurate and unbiased set of reviews that will hopefully reveal what the brokers are like to work with, or what to look out for if someone was disappointed with the service they received from a particular broker.

You should also check what qualifications a mortgage advisor has. In the UK the qualification that is approved by the FCA is the Certificate in Mortgage Advice and Practice (CeMAP). The brokers should also be authorised by the FCA, so you can check that they are by searching on the Financial Services Register.

Your rights when using a mortgage broker

When you work with a mortgage broker, they should complete a detailed review of your circumstances in order to establish the best deals to suit your specific situation. They should also be able to explain in detail the key information such as the different types of mortgages that there are.

Your broker should be able to advise you on the pros and cons of taking on different types of mortgage and advise which one you are better suited to. Their recommendations should be fully justified with a breakdown of the finances of the deal and they should explain why the deal is a better option for your circumstances.

There is a lot of jargon in the financial industry, so if you are not sure what LTV ratio is or why it matters, your mortgage broker should be able to help you to understand it and see the importance of it on getting a good mortgage deal. We have also included a jargon buster section at the end of this guide to help understand some of the terminology.

man and woman advice

What to look for in a mortgage deal

  • APRC

The Annual Percentage Rate of Charge shows you the total cost of a mortgage based over the full term, including all associated fees. By providing you with the APRC for different mortgages, you can see the financial difference from one lender to another over the period of time you choose to take the mortgage over.

  • Deposit size

The higher the amount of deposit that you are able to put down, the better mortgage deals will be available to you. The Loan to Value ratio (how much your mortgage loan is compared to the value of the property) is really significant in accessing different types of deals, as some deals are available for 80% LTV, others are for 70% LTV, etc.

  • The standard rate

If you are choosing a fixed rate for a number of years, it is also important to look at what the standard rate of the deal is when the fixed term comes to an end. Whilst you will usually be in the position to switch mortgage deals at the end of your fixed-rate, you don’t know what will happen to the mortgage market, so it is best to choose a deal with a competitive standard rate if available to you.

  • How often is interest charged

Most lenders charge interest on a monthly basis, calculating the average monthly payment over the term so that all monthly payments are the same. Other mortgages might charge a daily interest, meaning that the monthly payments vary depending on the number of days in the month.
explaining interest rates

  • Flexibility 

If your circumstances change, having flexibility around your mortgage payments can be really important. You may want to take a break from making payments if you need to at some point, or you may want to overpay so that you can pay your mortgage off quicker and reduce the overall interest. Check for any penalties or limits that the lender applies if you want to overpay on your mortgage. You should also check any early repayment charges that apply, to make sure that you don’t end up staying locked into a mortgage deal for longer than you need to be.

  • Length of fixed or variable rate deal 

Deciding on the length of the fixed rate can be a difficult decision, as it is difficult to predict how the interest rates will be affected over a three or five-year period. Some people prefer to lock themselves into a fixed rate for a long period so that they know exactly what their payments will be for that term. However, if circumstances changed, for example the borrower needed to move house, they might be subject to an early repayment charge to get out of the fixed term they agreed.

Your mortgage broker will be able to talk through your possible scenarios to identify more flexible deals if it is likely that you will need flexibility or the peace of mind that you can get out of your mortgage without a high penalty.

Conclusion

There are so many reasons for using a mortgage broker when buying a home but the key argument is that your mortgage is a huge purchase and one mortgage deal varies significantly to the next. Without taking expert advice from a broker, you risk paying thousands of pounds more than you would have if you had been shown a better deal from a broker.

As brokers have access to many more lenders than you would be able to access yourself, it makes sense to use them to access these other lenders that could save you a lot of money. With the majority of brokers not charging mortgage applicants for their services and instead working on commission from the lender, there is usually no additional cost for the applicant. So, you can access better deals, get free professional advice and have a lot of the hard work, such as admin, taken care of by the mortgage broker.

Jargon Buster

Understanding mortgage terminology is not always easy, so here is some of the terminology and jargon that brokers may use in more simple terms:

  • Affordability check

Where the lender checks how much you can afford to borrow based on income and expenditure. The calculations for this can vary from one lender to another.

  • AIP (Agreement in Principle)

A document that confirms the mortgage lender will allow you to borrow a specified amount. An AIP document is often used as evidence to the seller that the potential buyer will be able to afford their property.

  • APRC (Annual Percentage Rate of Charge)

The APRC shows the entire cost of the mortgage and includes all interest and any fees from the lender. The cost is based on paying the mortgage over the term agreed, so can be used to compare deals over the same length of term.

  • Arrangement fee

The fee that the lender charges you for setting up your mortgage. You will usually have the option to pay it upfront or for it to be added onto the loan and paid as part of your monthly payments. When it is added onto your loan, you will be paying the interest on it.

  • Arrears

If you miss any mortgage payments, these are classed as arrears. Your lender will have a set process of actions they take depending on how many payments are missed, which can result in your home being repossessed if payments are not made.

  • Base rate

This is the interest rate that is set by the Bank of England and affects tracker rates and standard variable rates. The base rate sometimes changes, it was as low as 0.25% in 2016 and was as high as 15% in 1989. In recent years it has not been higher than 0.75% but factors such as the inflation rate influence the decision made by the Bank of England’s Monetary Policy Committee on whether to change the base rate.

  • Buildings insurance

The insurance policy that pays for any damage to your property’s structure. A mortgage lender will require you to have taken out buildings insurance to protect their loan.

  • Buy-to-Let

A type of mortgage that is taken out when the property owner is buying the property but letting it out rather than living in it themselves.

  • Capital

This is the overall amount of money you borrow from a lender to buy a property.

  • CCJ (County Court Judgement)

If you have failed to pay an outstanding loan, the lender will usually register a CCJ court order against you. Having CCJs affects your credit profile and can mean that some lenders will not be prepared to provide you with a mortgage.

  • Conveyancing

When you buy a property the legal process involved is called conveyancing.
Deposit
The deposit is the amount of money that you are putting towards the cost of the property. Most lenders will ask for a minimum of 5% deposit before they will provide you with a mortgage loan. To access the more competitive loans with lower interest rates, a larger deposit is required.

  • ERCs (Early Repayment Charges)

If you want to pay off your mortgage early (i.e. when you sell your house or change mortgage deal) then you may need to pay an ERC. Usually ERCs only apply for the fixed rate part of the deal.

  • Equity

The equity is the amount of the property that you actually own. This is calculated by subtracting the amount you have paid (in deposit and repayments) from the mortgage loan.

  • Fixed rate mortgage

This type of mortgage has a fixed interest rate for the amount of time agreed, which will typically be two, three or five years.

  • Freehold

A freehold property is where you own the land rather than a third party that you lease the land from.

  • Gazumping

Where another buyer puts a higher offer in on the property that you have put an offer in for and the buyer accepts their offer.

  • Guarantor

A guarantor can act as a guarantee to the lender that the monthly payments will be made. A parent or guardian is able to act as a guarantor on some types of mortgage.

  • Help to Buy

A government scheme that aims to help more people to afford homes. There are different types of Help to Buy schemes and a Help to Buy Isa.

  • Homebuyer’s Report

This is the survey that is completed before buying a property that will check for any issues such as damp, subsidence, out of date electrics etc.

  • Interest-only mortgage

A mortgage where just the interest is paid and not the capital. This means that at the end of the term of the mortgage, the mortgagee will not own the property and will need to then buy the property.

  • Intermediary

An intermediary is a third party such as a mortgage broker who helps to arrange a mortgage, usually taking commission from the lender for their services.

  • Leasehold

The land that your property is built on is owned by a landlord and you must pay rent for the land, usually once a year.

  • LTV (Loan-to-Value)

The ratio calculated between the property value and the amount of your mortgage. Better deals are available for people with a better LTV ratio (for example, borrowing 60% or less).

  • Mortgage deed

The mortgage deed is the legal document to confirm the mortgage agreement.

  • Mortgage Illustration

The document supplied by the mortgage lender that details the mortgage offer and enables you to compare the product to others.

  • Mortgage term

The length of time that you take the mortgage agreement out over, often 25 or 30 years but this can vary.

  • Negative equity

Where you owe more on your mortgage than your property is worth. This can happen where property values drop.

  • Overpayment

Where you pay more of your mortgage than the amount agreed. Some lenders will penalise for doing this but it generally allows a borrower to pay their mortgage off faster and pay less overall interest.

  • Porting

Where you transfer your mortgage from one property to another, without the need to take out another mortgage agreement.

  • Remortgage

Taking out a new mortgage without moving house. There are different reasons for remortgaging, including moving to a better deal and releasing equity in your property.

  • Repayment mortgage

The standard type of mortgage where you pay both the interest and the capital repayments, as opposed to interest-only where you only pay the interest off.

  • Stamp duty

A tax that is paid when buying a property. This is currently applicable to properties with £125,000 or more.

  • SVR (Standard Variable Rate)

The rate that the mortgage reverts to once the fixed or tracker rate period finishes. People usually look for a new mortgage deal once the deal reverts to the SVR, as it will usually be higher than the interest they can get on a new deal.

  • Title deeds

A document that shows the ownership of the property.

  • Tracker mortgage

A mortgage with a variable rate that tracks the base rate, i.e. if the base rate goes up by 0.25%, so does the monthly mortgage payment.

How Do Joint Mortgages Work?

Taking out any type of mortgage should be a decision that is carefully considered and well researched but taking out a joint mortgage has even more factors to take into account before you commit to it. When you take out a joint mortgage, you become financially associated with the other mortgage holder(s), so all applicants should be sure that they are happy to be affected by the other person’s past, current and future financial situation.

How Do Joint Mortgages Work?

What is a joint mortgage?

A joint mortgage involves two or more people taking out a mortgage to jointly own a property. When a joint mortgage is taken out, the liability for paying off the mortgage will be split equally across the owners. Most commonly, this will be two people who are in a relationship who want to buy a home together but there are other situations where people may want to apply for a joint mortgage.

Who can get a joint mortgage?

The most common scenario is a couple buying a property together, but two or more friends could jointly buy a property, or a family member could jointly apply with someone, to help them to afford a property. The joint applicants will decide how any equity in the property will be split.

Another reason people take out joint mortgages is for investment purposes, as business partners working in the property industry.

If the mortgage applicants were not already financially associated by having a joint bank account or joint credit, then the mortgage will link them for the first time, and this can affect their credit score. Therefore, it is really important that you trust the person (or people), you apply for a joint mortgage with, in terms of believing that they will be reliable for making the mortgage payments.

Couple planning to buy a house together

How much can you borrow?

One of the key benefits of applying for a joint mortgage instead of an individual one is that the amount a lender will be prepared to lend will be based on the income and affordability of both applicants. This usually means that the price range for the property can be higher than if you applied as a sole applicant.

The amount you can borrow will vary depending on a number of factors, but many lenders work on the principle that they would lend up to 4.5 times the joint annual income after financial commitments and the mortgage term have been accounted for. So, for example, if one applicant earns £25,000 per year and the other earns £35,000, the lender would usually be prepared to let you borrow up to £270,000 if the term is over a long period with minimal financial commitments.

The approach to mortgage lending calculations has become more comprehensive over the years than a simple calculation of multiplying combined income, as it now involves working out affordability, reviewing credit records and incorporating any other outstanding credit.

Many lenders have an online calculator that will work out how much you are likely to be able to borrow, by providing information such as your incomes, the amount you would like to borrow and the amount of deposit that you have. This calculation is not a guaranteed amount, as the lender will perform credit checks and work out your affordability based on monthly outgoings before agreeing how much to lend.

How much does a joint mortgage cost?

Applying for a joint mortgage costs the same as applying for an individual mortgage, with the same fees and other costs. The only cost difference that might apply is if you have some additional work completed by the solicitor, for example, if one applicant has a larger amount of deposit and they want that to be protected, the solicitor can put this in writing.

If you are able to put a bigger deposit down between you then this means that you might be able to get a mortgage that has a better interest rate than if you had a smaller deposit. So, this is another potential benefit to applying for a joint mortgage rather than a single one.

How does a joint mortgage work?

There are two types of arrangements for a joint mortgage. One involves a joint tenancy, and the other option is to be tenants in common. You will need to decide which option is the best for your circumstances but generally, couples applying for a mortgage together will choose to be joint tenants, with equal rights to the whole property. Under this arrangement, in the event of one person dying, the property automatically is passed over to the other owner.

If the property is sold, any profits are split equally and if the owners wanted to remortgage the property, it would have to be done jointly again.

With tenancy in common, the owners own a share in the property, so one person might have a 40% share and the other has 60%, or however you agree to structure it. The solicitor will draw up a ‘deed of trust’ to specify the percentage that each person owns.

If one person wants to then sell, they can sell the share in the property, or leave the share in their will to someone.

Couple taking out a joint mortgage

How does credit score affect the application?

Credit checks will be completed for every person applying for the joint mortgage. If one person has a very good credit score, this can benefit the other person and improve their chance of being accepted for a mortgage that they would not otherwise have been able to get. However, if someone has a poor credit score, this can be a disadvantage to the person with better credit, as they might get declined for a mortgage based on the other applicant’s credit score.

Before applying for a joint mortgage, it is a good idea to get a copy of both of your credit reports, so you can see what the situation is before you start the application process. One person might not even be aware of the poor credit score, so getting a recent copy is a good idea anyway before applying for any mortgage.

In some adverse credit cases, people decide to buy the property in one person’s name, as this is the only way the mortgage application will get accepted, so once you have the credit scores, if there is an issue with either of them then you will need to discuss the best option. Getting guidance from a broker might be useful for getting some impartial advice on what the likelihood is of getting a mortgage based on the specific details and to talk through the different options that are available.

Getting out of a joint mortgage

One of the main reasons you should not rush into a joint mortgage is that circumstances can change, such as a divorce or separation. In this case, getting out of a joint mortgage is not easy and can be very stressful. You cannot simply take your name off the mortgage if you want to move out and you will have to try to find a solution that works for both parties.

You might find that one person wants to stay in the property, in which case they would need to be able to buy the other person out of the property and must also be able to get a mortgage approved for the property based on their individual income. To buy someone out, you would need to work out what equity is in the property by getting it valued and then half of the equity would need to be paid to the person coming off the mortgage.

The first step would be to talk to the mortgage lender to explain the situation and to find out whether they would be happy to remove one person and allow the other to keep the mortgage in their individual name. You would then go through the legal process of ‘transfer of equity’ but there can be many more complications involved, for example, if one person put more deposit down.

If neither person can afford the mortgage on their own, or neither wants to remain living in the property, the property will need to be sold and then the mortgage can get paid off. The selling process can also cause issues, as one party might want to hold out for a higher offer, or the property might be very hard to sell.

Once you no longer have the joint mortgage, you would also need to submit a financial disassociation request to have an ex-partner taken off your credit report to ensure that their financial situation will no longer impact yours.

Conclusion

When you take out a joint mortgage, you are creating a financial association that can be difficult to get out of, in the event of a breakup or other scenario, and you must also consider how the connection will impact your own credit score. If you have reviewed your credit scores and are happy to take any risk involved with that, then the next step is to find out how much money you can potentially borrow as a joint mortgage application.

Speaking to a broker such as Boon Brokers will help you to understand what the best mortgage options are based on your circumstances and they will also be able to provide expert advice on details such as when one person is paying a bigger deposit than the other. If you are considering taking out a joint mortgage, call our team today to find out the different options that are available and to find the best joint mortgage deals.