What are Bridging Loans?

What are Bridging Loans?

One of the key elements in securing funding is Timing. You have to make sure that the funding you get comes just right on time when obligations start popping up. It’s the only way to make sure that you don’t put yourself in a situation where you are faced with debt and no source of credit is readily available for you.

But what, in the off chance, that you do find yourself in such a situation? What is your option if your stuck in the Financial equivalent of in between a rock and a hard place? This is where Bridging Loans will become your go to source of funding. And in order to make full use of such option, there are a few things about the concept that you need to know about first.

What Exactly are Bridging Loans?

The best definition of is that it is a short term, property backed, and interest-only type of loan that allow you funding for a period of time while also not preventing you from refinancing yourself to a longer-term debt or in selling a property.

In essence, it “bridges” the gap that you might encounter when you are faced with incoming debt while there are no available mainline sources of funding for that period of time. A key feature with bridging loans is that they have one of the higher interest rates among the various financial products provided in the market right now.

You might think that that makes bridging loans a hassle to deal with but the truth is that they are actually quite flexible with the obligations they impose. They are quicker to arrange and the terms on offer can be changed depending on the policy issuer.

How Does it Exactly Work?

To understand how Bridging Loans work, here is a scenario: suppose that you are planning to buy property from a public auction. You’re intention is to renovate the place, add some new additions here and there, and then sell it at a higher value.

However, you don’t exactly have the money with you right now. In fact, you don’t have any money with you right now to even validate your bid.

Normally, this would get your bid disregarded but you can apply for a Bridging Loan to get your bid honored. When you apply for a bridging loan, the lender would ask for what purpose you are applying such a loan.

Provided that you can prove to them that such purpose is necessary and that you have the means to achieve your plans, they will release the funds and you can purchase the property you won at the auction.

Why are Bridging Loans Offered?

There are a number of reasons why bridging loans became popular in recent years but they all boil down to one, major crux: getting other loans has become harder in recent years. Banks and other lending institutions right now are becoming more reluctant and pedantic to provide the usual loan products to people; most especially homeowners.

Perhaps the recent fluctuating state of the economy has made loaning institutions all the more cautious when providing loan contracts to applicants. Due to instability in the market, lenders are not too keen to be opening new contracts and expose themselves to more risks.

But problems do provide opportunities for solutions. With the need of funding still strong, there was are still a number of bridging lenders appearing in the market with an appetite to do business.

There are a number of reasons as to why bridge loans are applied for but they all boil down to the following:

Buying at an Auction

This is where the scenario a few paragraphs before falls. Winning bidders at property auctions for real property usually need to exchange contracts and, most importantly, pay the deposit as soon as the auction is over. The full amount will then have to be paid within 4 weeks or 28 working days.

Mortgage is not highly applicable in this scenario as the approval period can take longer than the grace period given to you by auctioneers. Bridging loans can be put up in a shorter time. Then, you can pay on the loan through the sale or a remortgage

Rejection of a Mortgage

There are many reasons why people get rejected out of a mortgage application. This includes a bad credit report or having no means to pay for the obligations arising from the contract. However, that problem may only be temporary as credit reports can be fixed and financial deficits can be overturned.

With a bridging loan, you can have the money necessary to purchase a property as soon as possible before anyone else makes a counter-offer. Once you have the means to provide for the obligations, you have the option to switch to a standard mortgage.

Renovations

One other reason why mortgages get denied is that the property the applicant wishes to use the money for is deemed uninhabitable.

As such, this leaves renovators with a dilemma: how are they supposed to get funding for something that the would-be lender is hesitant to provide funding for?

This is where a bridge loan would serve as a viable alternative as their terms can be made to be flexible enough to give the buyer enough money to carry out their work. Once the property is re-mortgageable, the buyer can then sell it to pay for the loan. This makes bridge loans also applicable if you want to renovate the property and borrow against its increased speculative value.

What are the Pros and Cons of a Bridging Loan?

As with any financing product, there is both an advantage and disadvantage to expect when applying for bridging loans. As such, you have to consider both the pros and cons inherent to this loan product. They are the following:

Pros

Fast Approval Process

A bridge loan can be approved in as little as 14 days. This is far shorter than usual loans which takes 3 weeks to a full month to get approved.

No Monthly Repayments

Bridge loans usually do not require regular installment payments in order to pay for the full amount. This makes it easier for you to raise capital if your finances are currently tight but have still enough to pay for the rest of the amount you loaned.

Competitive Interest Rates

Bridging loans are the hottest thing in the finance market right now. As such, they enjoy from relatively low and competitive rates with interest going as low as 0.37% per month. For completeness they could range up to 1.5% per month too.

Low Asking Price

The nature of bridging loans allows you to request for the speculative amount of the property even if its current market value is low. This means that it is highly possible for you to purchase the property without having to put in a separate deposit for the loan.

Potential for Strong Return of Investment

Bridging loans are used nowadays to fund projects that would turn uninhabitable and cheap properties into potentially high-selling prime property projects. In essence, you can use the loan for example, to buy a property cheap, add in some improvements, and later sell the entire place for more than 3 times its former selling price.

No minimum term

ie Loans could be repaid from day 2 onwards.

But for everything that is awesome about bridging loans, you also have to consider its potential setbacks which include:

Cons

More Expensive

Compared to traditional mortgages, bridging loans are comparatively pricier. Even with dropping interest rates, traditional mortgages are still the cheaper and more economical alternatives for most home buyers.

Potential Repayment Issues

As with most short-term loans, you can face problems with your chosen repayment method. If you can’t repay everything within the set period, you leave yourself at risk of having the property you bought and improved using the loan repossessed by the lender.

What Other Factors Should I Consider before Applying for One?

Before you even consider applying for a bridge loan, there are a number of things you have to ask first?

What is the Total Cost for the Loan?

It is a standard in looking for loan products that you not only look at the interest rate but also the total cost of the loan before applying. People think that low interest rates are good but that could be easily counteracted with fees like exit fees, management fees, and other so-called “hidden” charges. In essence, you may think that you are saving money on your loan but you are actually spending more.

What’s Your Repayment Method?

One of the dangers with bridging loans is that you are unable to pay for the total amount once the period expires depending on the repayment method you chose. Always put enough thought on how you will repay the loan upfront and make sure that the exit method you choose is highly viable.

If you are planning to sell the property, make sure that the terms of the loan provide an ample period of time for you to find a buyer and for the sale to be completed. That means either you have not a lot to pay for the loan or just enough for it which results in a break-even for you.

If your exit strategy involves shifting into a longer-term loan, you should check if the terms of the bridging loan and that of the loan you are applying for are compatible with each other.

What Bridging Loan Type Should You Get?

Normally, lenders would offer you two types of bridging loans.

Closed Bridge Loan

This loan requires you to determine exactly how you will be repaying the amount. This means that you will have to put in writing or explain clearly to the lender of your “exit plan”, the method you are going to use and repay for your obligations. Typically, closed bridge loans must be settled within a few months.

Open Bridge Loan

Unlike the closed plan, this loan does not require you to detail your exit plan out of your obligations. This means that they are the more time-saving alternative as you can get the funds for urgent or emergency transactions. Also, they have a longer time table for repayment going up to a year or 18 months, depending on the lender.

Is this a First Charge or a Second Charge?

Second charge loans are applied if you already have secured a loan against a property with an outstanding mortgage. In other words, you might get another bridging loan to pay for improvements since you already secured a first loan to buy the property which is the first charge.

Knowing if the loan you are applying is either the first or second charge will let the lender know your priorities if obligations from such a loan arises. Due to the nature of second charges, there is a chance that you may not have the means to pay off for the loan as you are focusing on clearing down the first loan.

What is the Rate?

The rates of a bridging loan can affect your ability to pay for the entire amount. A fixed rate, for starters, is ideal for those that want a bit of stability in their exit plan. This is for the simple reason that you have agreed to the entire amount beforehand.

The only disadvantage with fixed rates is that they are generally higher. You may end up paying for more as you pay for the security.

Alternatively, variable is great for those that are used to a bit of flexibility with their payment methods. The primary amount may change from time to time but you may end up saving more on the long run.

But, then again, its variability can work for and against you. If market rates are on the verge of spiking upwards, it might be better for you to pick a fixed rate.

Aside from fixed and variable rates, you should also consider other payment rates for a loan.

Monthly Basis

The interest is separate and the total sum is not added to the entire loan balance.

Rolled Up

Here, you will pay for the entire compound interest along with the loan’s amount when payment is due.

Retained Interest

In this payment method, your monthly interest is covered until a date agreed upon by both you and the lender. This is so that you can pay the full amount when it is due.

Are there Any Other Fees Involved?

Aside from the total amount loaned and the interest, you should also be mindful of any charge that the lender can add to the loan on top of everything else. These include:

Arrangement Fees – This is the fee the lender asks for having to set up the contract with you. Under the law, the amount for this charge goes in between 1 to 2% of the total loan.

Exit Fees – If you plan to pay your dues before the agreed time expires, some lenders might charge you for a fee of around 1% of the entire loan just for doing such. Fortunately, this is not a common practice among lending institutions but you have to ask of such from your lender first.

Repayment Fees – These charges are often meant to compensate the lender for the costs they entailed processing the contract. This, of course, includes the paper work and other pertinent matters to your transaction with the lender.

Valuation Fees – This is to cover the fees of the surveyor who is going to assess the property for its new value over the old one based on your investment on the place.

To Sum Things Up

The point of all these questions is that you must make sure that you understand everything about the loan before applying for one. This includes terms as well as the obligations that could arise from binding yourself to such a contract.

If possible, always ask for a complete breakdown of costs before taking a loan. Lenders are compelled by law to provide every pertinent information that you ought to know before you fill in the application. After all, concealment of material information would leave these firms in serious trouble with the law if such a fact were to be discovered.

How Much Can You Borrow From a Bridge Loan?

Due to where bridge loans are usually applied for, the amount that you can borrow from such products are more than considerable. The sweetspot as it were ranges from £100,000 to £1,000,000. This is the main bridging market. Between £25,000 to £100,000 means there are fewer lenders available to look at these loans. Below £25,000 is not very open at all.

But, if you plan to purchase properties, especially large ones, you can expect to have the loan go up in between £1,000,000 around London depending on the valuation of the property. The farther away from London the more difficult it becomes. At the top end loans of £5,000,000 are also rare. With some lenders, you might even borrow more if you can put a number of properties forward or have a compelling enough plan to buy one property and turn into a massively profitable venture.

But here is one thing that you should know about the lenders. Even if they approve your loan, they will rarely pay the full amount. They will provide you with a quote based on the loan to value rate of the property which can go in between 65% and 75% of the total value if the property is residential in classification. For commercial properties, that LTV is going to be in between 60% and 65%.

The reason for this is that commercial properties are actually harder to value and even more difficult to sell later on given the current state of the economy. For residential properties, the valuation is easier as there are more sales to compare with and come up with an accurate value.

Either way, higher LTVs often denote higher risks for the lender. As such, it makes perfect sense why lenders would hold out on giving the full amount to any applicant, no matter how good the deal is.

What are the Requirements for a Bridging Loan?

As with other financial products, the requirements for bridging loans would vary from one lending institution to another. However, you can expect for the application process to be the same across all of your potential lenders. This includes you filing an application, the lender processing your application, and waiting for the mandatory period before the loan is approved and you can collect on the amount.

But when it comes to bridging loans, you can expect that the lender will be primarily focused on the value of the property which shall be used as collateral for the loan. Of course, your financial information will matter and this includes your credit report, your statement of income and assets, and other financial records.

For some more complex bridge loans that deal with investment properties, other documents will be required such as lease agreements and other similar contracts.

To Conclude

Without a doubt, bridge loans are a great option for those that are buying and investing on real estate properties. But, as with any loan, the best way to enjoy the benefits of this financial product is to keep up with the terms and conditions you have signed up for it.

Hopefully, this article was able to inform you on what a bridging loan is and what you can do with it. All that is left to do now is to find out what short-term financing options are made available for you in your area.

How Much Can You Borrow? A Guide to Calculating Your Mortgage in the UK

The price of properties in the UK has always been a problem for many would-be owners. In most cases, you won’t have enough on your bank account to pay for one parcel of real estate here.

Fortunately, there is always the option to get the funds yourself through a mortgage. But this does lead you to asking the question: how much mortgage can I get in the UK?

But here is one more important question that you need to answer:

How much mortgage can I afford?

To answer these questions in one sitting, you need to understand a few concepts.

What is a Mortgage?

A mortgage is simply a loan offered to you to purchase property or sizeable parcels of land. These are long-term loans since the lender wants to profit from their contract with you for as long as possible.

To motivate you in repaying what you owe, the loan will be secured against the property you will purchase. This means that if you can’t pay off the loan, the lending company can repossess the property and sell it to someone else. This way, the lender can at least get back a portion of the amount that they loaned to you.

Where to Get a Mortgage

Aside from asking “how much of a mortgage can I get?”, you should also consider where you would get it. Fortunately, there are quite a lot of financial lending institutions in the country where you could apply for a mortgage at.

If you want to make things easier and do not mind paying for extra, you can also avail of the services of an Independent Financial Advisor who could find and compare different mortgage plans available for you in the market.

Regardless of what route you will take, it is expected that you know of the following before you consider getting a mortgage:

• The kind of mortgage that you need or want.
• The property that you want to buy.
• How much you want to borrow.
• How long you want to pay for it.
• The interest rate that you can manage.

In some cases, the lender will ask if you have sought the help of an IFA. This is because they would rather want to know how well you are aware of the consequences of signing up for a mortgage.

Applying for a Mortgage

Regardless of where you get your mortgage at, applying for one is always a two-step process.

Phase 1: Investigation

In this part, the lender would ask a series of general questions to know who you are. They would generally ask what is the reason why you are applying for a mortgage and the payment terms that you are comfortable with.

They would also try to look into your current financial situation. This is just to get an idea as to what you are really looking for and how much money they are willing to lend you.

Phase 2: Application

At this point of the process, you will have to fill up an application form. At the same time, the lender is going to conduct a full-on investigation on you. This is to find out how much of a risk you will pose to them as a borrower.

To do this, they will have to go over your financial records .The lender would want to know whether or not you have been faithful to any previous financial obligation.

Lenders would also look into your financial stability over the duration of the loan. Keep in mind that rates do increase due to outside factors and your ability to pay for the mortgage may not be the same within half a decade or so.

If your application is accepted, lenders will give you a “reflection period” which lasts for 7 days or more. This will give you enough time to consider other options.

Why Deposit Size Matters

Aside from asking how much of a mortgage I can get in the UK, you should also consider your deposit. This will act as your part in contributing to the overall cost of purchasing the property.

One advantage comes in the form of Loan to Value or LTV. This is the amount of your home that was loaned from the mortgage compared to the amount that came straight from you.

Supposed that you were to buy a house at £250,000. How much of that comes from your own pocket? If the amount you deposited is £75,000, then that means that you own 30% of your house. The 70% will be your LTV and the mortgage will be secured for that.

The beauty with LTVs is that they are directly proportional to your interest rate. Usually, interest rates are their lowest when the LTV reaches the 40% margin in the UK.

How Your Credit Score could Affect your Mortgage

When you think about it, the mortgage is a trust given to you by the lender. If you are trustworthy, the lender will not hesitate on approving your loan application.

Your credit score will prove just how trustworthy you are as a mortgagee. A higher credit score would result in a faster approval of your mortgage as well as a higher loan. On the contrary, low credit scores could result in fewer mortgaging options.

Improving your Credit Score

Here’s a quick run-down of what you could do to improve your credit ratings:

Check Your Credit File

The three major credit reporting agencies (TransUnion, Equifax, and Experian) can offer you a copy of your credit report for a small fee. Check everything there if they are correct. Also, take note what factors have affected your rating the most.

Register to Vote

By registering to vote, you give some sense of permanency in your address. After all, you can’t vote in some place unless you have stayed there for a handful of years.

Mind Your Credit Cards

Have a quick inventory of your credit cards and find out which ones are unused and redundant. Have them then closed in order to boost your rating in the next report. Your credit cards must also be linked to your most present address so as to make the verification process easier.

Pay on Time

Your credit score tends to be more favorable the more consistent and prompt you are on paying your dues. Those that do negatively impact your score are payments that are late, missed, or defaulted.

As such, it would be best that you stay in contact with your providers regarding your payments and even if you are struggling. A pattern of consistent payments will eventually lead to a better credit score

Save Often

In conjunction with the tip above, you should have a sizeable amount of money stored just in case your regular income is not enough to meet your monthly expenses. This way, you have something to pay for your dues which improves on your score.

Also, this helps you save enough money to contribute to the purchase of the property which improves on the LTV of your mortgage.

Income

Usually, mortgage lenders will apply a multiple based on your income to determine how much you can get from them.

So, if you apply a lender who uses a 4x multiple on income and you earn £50,000 per year, that means that you could get a loan for as high as £200,000 out of that lender. Of course, the final amount depends greatly on the multiple that they use as well as some other factors.

The best way to take full advantage of the multiple is to add extra sources of income on your application. So if you were to earn £50,000 from your work and £20,000 from a business, the latter amount might be added to the former. So, the equation would be £50,000 x 4 + £20,000 = £220,000.

Considerations on Income

Just keep in mind that a lot of lenders now use income multiples in determining the maximum amount that they are going to lend to you as well as some other stringent affordability assessment processes.

For compensation income, the multiple will only cover your basic rate. Lenders would generally exclude other payments like night shift differentials, overtime pay, and holiday pay.

In addition, the amount of income that you will declare will have to be proven through pay slips, contracts, income statements, and other financial records.

As such, aside from asking yourself how much mortgage can I get, you should also make sure that you leave a good impression by way of your yearly income statements.

Can I Borrow More than my Current Salary?

“So, in determining how much mortgage can I get, can I possibly secure an amount 5 times or more than my current salary” You ask yourself. The answer is Yes.

You will find out that there are some lenders out there who are generous enough to allow you to borrow more than £200,000 in mortgages with interest rates that are comparatively manageable.

The only downside are the more demanding requirements. In fact, there are two ways that your application for this kind of mortgage can get rejected. First is if you cannot deposit more than 10% of the value of the property. The second is if you have not been earning more than £150,000 for the past few years.

Repayment terms for these of mortgages are longer. Some could go up to 30 years which is long enough given that your financial status could change within only a few years to half a decade. However, such mortgages do have more manageable repayment rates.

Costs

What about the amount of money that leaves your wallet on a regular basis? Expenses and other outgoing money entries are perhaps two of the biggest considerations lenders look into when you apply for a loan.

Here are the costs that a lender would look into when investigating you:

• Other financial obligations like loans and credit card payments.
• Council taxes.
• Domestic utility expenses like rent, electricity, water.
• Insurances like life, building, and unemployment.
• Motor expenses like repairs, insurance, and tax (provided that you own a vehicle, of course).
• Family expenses like tuition for children, child maintenance expenses, and others.

For some lenders, they might even include a reduction depending on the number of children and dependents that you have. Others have also taken expenses like discretionary costs into account.

Lastly, lenders would have to ask for an assurance that you have the means to keep up with repayments regardless of any increase in rates as well as outside economic factors.

As such, it is recommended that you reduce your spending before you apply for any mortgage.

Some Other Things to Consider

“So how much mortgage Can I get in the UK?” You ask yourself for the last time now. The answer depends greatly on your earnings and your ability to manage repayment.

However, there are some other factors that you should also look into when it comes to mortgages.

Being Stuck in the Same Job Helps

What a lot of lenders are looking for is job security. This will tell them that an applicant has the means to keep up with repayment terms.

As such, even if your career has seen no movement for a while, being stuck in a stable job for years on end might just increase your chances of getting a higher mortgage amount.

Consider a Joint Application

There is always the option to buy the property with someone else. Another mortgagee can boost your chances of securing a large mortgage. This can even help you if your co-applicant has a sizeable source of income and a good credit score.

However, this is a rather big commitment. If you apply for a mortgage with someone else, both of you will be solidarily liable for the entire amount. That means that the lender can go after either of you in case you default on your payments.

Never Edit as You Please

Once you have started applying for a mortgage, don’t go back and change some figures. Not only will this delay your application for quite a bit but it also leaves a bad impression on you to the lender. As such, it is best that you make sure that everything in your application form is correct and you commit to those facts as stated.

But if you do have to change something in your application form, you need to contact the lender as quickly as possible and give them a reasonable explanation. This will prevent any unnecessary delay and ensure that you get your loan as quickly as possible.

Do You Need a Mortgage Broker?

The securing of funding for a major investment such as a house can be quite challenging. As such, you might think that the assistance of someone who presents themselves as an experienced dealer in the highly competitive property market is a godsend for would-be homeowners.

And by design, mortgage brokers should ease up a lot of complications from securing funding for your would-be purchase of a property. However, this does give rise to the question:

Are they Needed?

The answer, surprisingly, is not really. You can technically secure that funding on your own. However, there is without a doubt that the assistance of a broker will make the approval process of your mortgage all the more easier for you.

Addressing the Elephant in the Room

Before anything else, it is important that we tackle the issue. Why are brokers not exactly integral to securing that all-important mortgage?

Those that have secured their mortgages without a broker have their own specific set of reasons why. However, all of these reasons can be grouped into 4 different categories.

The Fixed Rate Period

A lot of brokers claim in their ads that their services can help you save in the long term. This is because they can find the lowest possible fixed rates in the market.

The truth is that most homeowners would be better off securing a variable rate mortgage nearly 90% of the time. The reason is that a lot could happen within a period of a few years. If you choose the broker’s fixed rate promise, you might be shouldering an increasingly unmanageable obligation.

You Already Have an Established Relationship with a Bank

The one factor that makes securing a mortgage hard is that the lender and lendee have no relationship. You don’t know the bank and the bank, in turn, does not know you enough to trust you.

As such, in this instance, a broker can come in handy as their line of work allows them to work closely with lenders on a regular basis. With someone trustworthy to advocate for you, the bank will easily approve of your request for a mortgage.

On the flip side, a broker is no longer necessary if you have an established relationship with the bank. If you can easily stroll in your local bank and ask the clerk (who knows you on a first name basis) of their mortgage offerings, then you can secure that mortgage by your lonesome.

Stigma

More often than not, people avoid brokers because of the negative reputation they have. Most of it can be traced back to how “fraudulent” and pushy these brokers can get.

For example, it was common in the old days to find an amateur broker to claim that they know of interest rates that are 2-3% lower than what the Bank of England offers. Some would even just display the bank’s previous rates, not the best available rate online.

What you have to understand is that brokers, like any mutual fund sales agent, only get paid if someone buys a product that they are hawking. Their services might be advertised as “free” (Hint: it’s not. Especially in the UK.) but you have to know in what other ways they are compensated.

The Push for DIY Investments

The biggest argument against brokers today is the wealth of information readily available to people to make better investment decisions. Mortgage rates are always posted online and there are apps that allow you to compare and contrast current mortgage rates.

Research can really help you make better informed investment decisions nowadays. If you are quite confident in subjecting yourself to the ins and outs of this market, you might even secure a favorable deal with a lender with no additional strings attached.

On the Flip Side….

What can you expect if you do avail of the services of a broker? Their assistance can come in a number of forms designed to help you through every phase of the funding process. These include:

Learning How to Buy

Buying a house can be stressful. There are just too many rates to compare and keep track off and the market itself can change drastically within a short period of time.

A particularly good broker can guide you through the process of securing a mortgage and buying property. In addition, they can answer any questions you have to clear up your confusions and doubts regarding the whole process.

Comparing Lenders and Products

Try this experiment. Go to your local bank manager and ask them which mortgages they have to offer. After that, you must ask an expert broker the same question.

You will find that the bank manager will try to push you into buying “their product”. On the other hand, the mortgage broker helps you find the “best available product”. It’s surprising how two different people operating in the same market can have different perspectives on what you need which leads to different results altogether.

A broker can help you save time, avoid getting confused in the process, and have a better chance of securing a better mortgage rate. Without a broker, the chances of finding a good deal are significantly lower.

Benefiting from Their Experience

Home loans are particularly tricky products. A small difference in the interest rate could yield huge repercussions for you in the years to come. For example, a 0.2% change in the rate could result in you paying a difference by that range from a hundred pounds to thousands every year, depending on the case.

A broker is someone who usually has years’ worth of experience dealing in the financing world. They spent years honing their craft and learning information that would answer every possible question that you might have.

However, the most important thing that they know is how to get your application for a mortgage approved as quickly as possible. Also, they know which loans would work for your budget and goals.

Speeding Up Applications

The most exhausting part about applying for a mortgage is the torturous wait to get it approved. This can be disadvantageous in some cases as prices in the property market can be quite volatile. Some properties even change prices every few days which means that you have to secure the deal ASAP if you want to get it cheaper.

Through the use of their connections and their knowledge of the application process, the broker can speed things up for you while keeping everything perfectly legal (of course). If you avail the services of a particularly well-established broker, you can have the mortgage approved within half a week.

Easing Up the Buying Process

A lot of banks have large credit departments. And because of that, they have a tendency to get disorganized.

A single bank can receive hundreds of mortgage applications a day and, thus, it is not unlikely for an application to get lost from time to time. Some banks would even forget that such clients exist even after making a meaningful first meeting with them.

The broker can act as a liaison between you and the bank. They can update you on what other requirements you have to meet to speed up the application and can set up appointments on your behalf.

Aside from that, they can act as a middleman between the real estate agent, the conveyancer of your choice, and you. With their help, the act of finding a good piece of property to invest in is easier.

Specializations

This might come as a surprise for you but not all brokers share the same skills and expertise even in the field of securing loans. There are some situations that are too complex or difficult to handle where the assistance of a specialised broker will come in handy. Brokers can specialise in a number of fields which include:

Residential Property

This is where most brokers fall under. Their work simply involves helping clients get a competitive interest rate as well as providing guidance on investments and financing, including refinancing.

Investment Property

These brokers typically help sole entrepreneurs increase their property portfolio by acquiring Buy-to-Lets and HMOs.

Development Finance

These brokers specialize in Construction Financing which perhaps one of the more demanding fields of Finance to day. They can simplify the entire process for would be investors for large construction projects while providing advice on where things can go possibly wrong. This may also include brokers able to arrange Bridging Finance, a more short-term but expensive option.

Commercial Properties

Brokers under this specialisation offer services for would be business owners or purchasers of commercial property. It is important to know that commercial properties operate differently than residential ones. Valuations tend to be based more on revenue than say brick and mortar more typically found in residential properties. Requirements for securing mortgage revolving around commercial properties will be stricter and would require a broker who can establish a good relationship between lender and lendee.

Bad Credit

A poor credit rating can be detrimental to you in a number of ways, chief among them being the fact that it could get your mortgage/loan applications instantly denied. A bad credit broker specialises in helping people with poor credit reports avail of the best loan that matches their needs.

Some brokers of this specialisation can also offer advice on how to meet the obligations incurred by such mortgages and get such actions to reflect positively on their client’s next credit report.

Non-Resident

As the name would imply, these brokers specialise in helping non-resident buyers in securing funding for property investments. They can orient foreigners on the standards and processed being observed in the UK market while also helping them meet requirements in order to legally invest in the country.

Employment

If you are out of a job and in desperate need of cash, these type of brokers are your go-to people. An employment broker can help you get in touch with a lender and build up a strong case that will help you secure a sizeable loan for your new employment or a new business venture.

Non-Traditional Properties

A broker of this caliber specialises in dealing with properties that could not be easily categorised as either commercial, residential, agricultural, industrial, or land parcels. Areas like studio apartments, hobby farms, and high-density apartments are where these brokers specialised at and can help sellers and buyers of such lots get the best possible deals.

How do Brokers earn Money?

What you have to understand is that brokers are essentially middlemen between borrowers like you and lenders like the different banks in your area. However, this does give rise to another question: how much should you expect to pay for their services?

The service fee you will have to pay up at the closing of a deal is a mere percentage of 1% to 2% of the total amount being loaned. For instance, if the mortgage you secured is priced at £200,000 then your broker will expect payment in between £2,000 to £5,000 depending on your agreement.

Are there any other fees that you have to be aware of if you seek the help of a broker? The answer is yes. There are other charges that you have to be aware of if you do seek the services of a broker. These include:

Fixed Fees

A broker is within their rights to ask for payment for their non-transactional services which include advising their clients and preparing documents. Fixed fees range in between £400 to £750 depending on the specialization and depth of experience of the broker.

Hourly Rates

If a broker has to spend valuable time in advising their clients, they may charge their clients for it by the hour. Again, this does not have a fixed rate but you can expect to pay more of a broker the more time in a day they have to devote to your case.

Combination

Some mortgage brokers use a combination of these payment methods to profit from their work. For instance, a broker might charge an hourly fee but they can also earn by commission.

“Free”

Notice the quotation marks. If a broker says that their advice is “free of charge”, that is another way of saying that they are getting their money from somewhere else for this transaction. More often than not, they are paid in commission by the lender directly.

As for other hidden fees, you need not worry. Under UK law, brokers are required to disclose all the fees that they charge to their clients and in what amount or rate. Each of their fees should be itemized and should contain a detailed explanation as to what the fee is for.

Also, laws further regulate how brokers can profit from their services rendered. For instance, they cannot charge any hidden fee or tie their pay to your loan’s interest rate. Also, they cannot be paid both by you and the lender or get paid for steering you into securing a mortgage agreement with an affiliated lender.

What to Look for in a Mortgage Broker?

As your go-to person in securing the funding for a property, you have to make sure that your broker is one of the best in the field. After all, if they are incompetent at their job, what are your chances of getting the best possible deal out of your would-be investment?

When looking for a mortgage broker, there are several things that you have to be aware of aside from the usual formal stuff like experience and a duly renewed license. They are, but not limited to, the following:

Your Interests at Heart

It goes without saying but the broker of your choice must be there to make the process easier for you. With their knowledge and skills, they should be able to remove any confusion from the process of getting a mortgage.

As such, you have to pay attention as to what they want to be done in the soonest possible time. If a broker insist that you get a mortgage ASAP, there is a chance that they are in the business to earn a quick profit.

Meticulousness

Always remember that the Devil is in the details whenever money is involved. Unfortunately, it is all too common in securing funding for important details to get lost in the communication. This could result in your application being delayed as the lender has to make extensive background checks (they may even pull off a hard request from your credit report) or have it denied outright.

You will need a broker who is on top of things in making sure that you meet every requirement and every information you give out is 100% factual and accurate. You should also look at the speed of their work. You don’t want a broker that rushes things through as this increases the chances of your application being delayed.

Work Ethics

Obviously, you would rather work with a broker who maintains a professional image. Have someone that is punctual enough to meet you on appointed dates and keeps things short and direct to the point.

Also, you want to work with someone who is friendly and polite enough in your engagements with them. If you can, seek referrals from past clients and even from lenders as they can provide you an insight as to who is the best in the market currently.

Street Smarts

Securing the best mortgage deal takes both diplomacy and wily. You will need a broker that keeps up with current trends and has mastered the art of negotiation. With their help, deals won’t fall through or get canceled at the very last minute.

A broker is good if they can keep the terms favourable to you. An even better broker knows how to make every party of the deal win. And that includes the lender.

Honesty

One telltale sign of a desperate broker is their tendency to over promise and under deliver. Offering deals that are too good to be true are a frequent occurrence in this industry. This is why consumers need to be able to identify when a broker is working against their best interests.

A good broker can lay out to you every possible consequence if you choose this plan over the other. No sugarcoating. No marketing buzzwords. Just the plain, hard facts.

Once they have laid out every possible outcome, they will then point to you which of these options would work the best given your current situation.

Also, it would be better if a broker can be frank with you regarding some defects in your financial information. If they think that your credit score needs work, they must tell you so and help you improve on it to get better deals.

Lastly, they have to be upfront with their fees. Not only is this required by the law as was previously mentioned but being honest with how much their work is going to cost you tends to help the broker build rapport with their clients.

Competitive Rates

Interest rates are currently at a low in the UK. When securing a loan with a mortgage broker, do not hesitate to ask the lender to compare them with other professionals who are offering low rates.

At worst, this request will be denied outright. At best, however, this gives your broker of choice the cue to get competitive with their offerings and help you find the deals that you need.

What you will be looking for here is their flexibility. A competitive broker knows when to drop their prepared deals to give you better ones if this means that you are satisfied with the transaction. A broker who does the opposite and insist that you get this mortgage with this rate is a sign that they are only there to make a living out of you.

One key factor to remember here is that you should always protect your interests. There is nothing wrong with being a little bit selfish when securing mortgages. After all, you will be the one shouldering a considerable obligation for years to come.

How Do I Choose a Broker?

There are actually several ways that you can go about looking for the right broker. You can always refer to friends and family as you might know of someone who has worked with a broker before. However, just make sure that that referral is legit and not just because your friend/relative is on good terms with them.

Another good source is your estate agent. Agents and brokers often work in tandem for certain projects and might even be on first-name terms with them. Larger estate agencies tend to have in-house brokers that you can go to although you are not obligated to hire their services.

Lastly, there is the UK’s National Association for Commercial Finance Brokers or the Financial Intermediary and Broker Association. They maintain a database of active brokers who operate in different areas. All you need to do is look for the ones living near you and get in contact with them.

In Conclusion

A broker might not be that essential in securing that important mortgage deal. But, without a doubt, their presence in the equation makes everything easier and less confusing.

What you have to always remember is that mortgages are long-term obligations. You will have to deal with it on a year to year basis. As such, you are better off letting someone who knows what they are doing get the best possible deals for you.

A particularly good broker can make sure that the product you get matches what you can pay for regularly. With this, you won’t get stressed out from paying for your loan in the years to come.

A Beginners Guide to Mortgages in the UK

New to learning about mortgages in the UK? Owning property can be simple and straightforward. However, in most cases, the would-be homeowner won’t have the money needed to purchase that property outright. And even those that do have the cash on hand at that instant would rather have their payments stretched over a period of time to better manage their finances.

So what option do you have to get the funding you need and purchase that property. The answer comes in the form of the mortgage. And in this beginners guide to mortgages, you shall be guided through the different aspects of a mortgage, the systems you have to follow, and how to manage the requirements that the contract demands from you.

Chapter 1. What is a Mortgage?

As intimidating as the term might sound, a mortgage is simply a loan. More specifically, it is a loan given to any person for the purpose of purchasing a property.

The concept of the mortgage is rather quite simple. In fact, it rarely differs from any other loan you would have to apply in any financial institution.

To start things off, you borrow money from the lender. There are some considerations you will have to meet first before you can get the full amount. Most institutions would ask a deposit of the property’s total value before you are given the full amount of the mortgage. The percentage depends on the policies of the lender and their assessment of the application.

Securing the Mortgage

Once you have the mortgage, it is expected that you will use that money to purchase the property or, at the very least, most of it. Whatever the case, you will then have to pay that amount of the mortgage over a period of time.

Of course, there are penalties to incur if you are unable to pay your obligations in time. Also, an interest will be fixed by the institution over your loan. After all, they have to earn in some way for letting you borrow money from them.

Also, although you will be living in the property, the lender technically owns the property. You will only become its full owners with no strings attached once the loan has been repaid in full.

Chapter 2: Kinds of Mortgage

Just like any other loan, there is more than one form of mortgage. In fact, there are more or less 16 different type of mortgages available in different countries right now.

But, for the sake of simplicity, let us look at the ones currently being offered by banks and lenders across the United Kingdom.

Fixed Rate Mortgage

As the name implies, the rate you will have to pay for this kind of mortgage stays the same throughout the duration of your contract. No matter what happens to the market be it changes in interest rates or even upheavals in the economy, your rate will always be the same from the first payment to the last.

One major advantage with this kind of mortgage is convenience. Since rates are fixed, you don’t have to deal with complex calculations as to how much you should pay for the next billing cycle. At best, this could help you in budgeting your monthly expenses.

The downside, however, is that fixed rates are usually higher than other mortgage rates. If you would think about it, a fixed rate plan allows the lender to earn more from their loan to you through the higher interest rate.

Also, if the interest rates fall below the fixed rate of your mortgage, lendees cannot benefit from it.

Variable Rate Mortgage

These mortgages feature a more fluid interest system in the sense that rates can change from time to time, unlike fixed rate mortgages, the rates here are generally lower and more manageable. However, there are certain aspects with this mortgage that you have to be careful with.

The Variable Rate Mortgage is further classified into 3 other mortgage types. They are as follows:

A. Standard Variable Rate

Known also as the SVR mortgage, this is the conventional variable mortgage with a rate that changes with the rise and fall of the lender’s base rate.

A major advantage with this kind of mortgage is the degree of freedom that it offers. You can overpay your loan and leave at any time depending on what you prefer.

However, that level of freedom also brings with it some degree of unpredictability. Your rate can be changed at any time throughout the duration of the loan. Worse, such changes can be implemented with short notice or none at all.

B. Discount Mortgage

This is a limited-period rate mortgage which applies for typically the first 2 to 3 years of your contract. The one thing that makes this mortgage type unique is that most lenders have their own program for discounts.

For instance, a bank might offer a 2% discount of your standard variable rate mortgage of 6%. This means that you only have to pay for the 4% for the first few years. Another bank might offer 1.5% discount of your SVR at 7%, meaning you’d have to pay for the remaining 5.5 for 3 years.

Pros and Cons

The benefit that this type of mortgage offers it is asking price. The rate starts cheap which should give you ample breathing room with your monthly expenses. Also, if the lender cuts their SVR, you will have to pay less for the succeeding months.

The downside, again, is the unpredictability. With discount mortgages, the lender has the authority to raise their SVR at any time. This means that you may have to pay a lot every month even if such payments are at a technically discounted price.

Also, this type of mortgage is utterly dependent on the base rates set by the Bank of England. If they raise, the effects that the discount should bring to your monthly expenses would drastically lower.

C. Tracker Mortgage

This mortgage has a rather unique movement in the sense that it follows the trend of the base rate set by the Bank of England plus a few percentages up.

For example, if the base rate goes up by 1.0%, then your monthly rate would increase by the same amount.

Tracker mortgages have the shortest lifespans among loan types as they last no more than 5 years. However, there are lenders that do offer trackers that last throughout the duration of your plan or until you switch to another contract.

Pros and Cons

The biggest benefit with this kind of mortgage is its dependence on the base rate. If it falls by even a few decimals, so will your monthly payments which should help with your budget. However, that also means that your payments should increase with every increase in the base interest rate.

Also, there are banks that require you to pay early repayment charges if you want to switch to another contract before the deal ends. As such, most lenders with tracker mortgages opt to let the deal cover its entire lifespan to avoid additional financial burdens.

Capped Rate Mortgage

Like the SVR mortgage, rates in this type of mortgage move along the line of the lender’s standard variable rate. However, there is a cap (hence the name) which prevents that rate from going any further up.

And since the rate doesn’t go up beyond a certain point, you can at the very least predict how much you are going to pay every month given the trend that your rate is following. Also, capped rates are cheaper compared to SVRs.

The major disadvantage with this plan is that the cap is often set at a high level. This means that the rate can still be expensive for lendees, even compared to fixed rate mortgages. Also, as with other variable mortgages, the lender reserves the right to change the rate whenever they feel the need for it.

Offset Mortgage

The most variable mortgage in the UK right now, Offset mortgages work by linking your savings account to the mortgage. This way, you will only pay the interest on the difference.

In essence, this kind of mortgage automatically takes the amount you have to pay monthly from your savings. This means that you don’t have to worry about budgeting since the money is already taken from your account.

With this scheme, you will still have to repay your mortgage regularly. However, by taking directly from your savings account, this mortgage gives you a better chance of clearing your debts at the soonest possible time.

Chapter 3: How does Interest for Mortgages Work?

The interest that you will incur for your loan will be crucial. After all, that rate is going to determine how much you will have to pay on a regular basis until the mortgage has been repaid in full.

The amount of interest you will have to pay for on the mortgage is dependent on the type of mortgage you choose. For instance, if you go for a fixed rate mortgage, the interest you will pay stays the same throughout the duration of the contract.

If this fixed rate period ends, you will usually be transferred to the lender’s SVR. This is usually higher than any special rate you have been offered previously. Also, at this time, you will notice that the payments for your interest will increase,

A Caveat

On the flip side, if you choose a variable mortgage, the amount you will pay will fluctuate right through the early years. This is because the rates set by the Bank of England go up and down depending on certain external factors.

If the Bank of England raises the rate, the costs for loans become steeper for lenders which they would pass on to anyone who wishes to loan from them.

This is why it is recommended for starting homeowners to opt for the fixed rate system so as not to hassle themselves with fluctuating variable rates. This is something that you should consider as no base rate from the Bank of England ever stays the same for more than 4 months.

Chapter 4: Where to Mortgage

This may not be apparent to you but you can only get a mortgage from a bank or a similar financial organisation. The granting of mortgages and other loans is strictly regulated by laws which is why only a few types of businesses are qualified to offer such to would-be property owners.

The most direct way to apply for a mortgage is to go to any of the local banks in your area and choose from their range of mortgage plans. Most banks offer more than two types of mortgage plans to fit the needs of every would-be buyer.

Should You Go to a Broker?

Alternatively, you can seek the assistance of a mortgage broker or an independent financial adviser. They can compare different mortgage plans available in the market (even the ones not advertised by banks) and can even help you establish a relationship with lenders. Of course, they would be asking for a fee of the deal you will make with the bank as that is the only way they can profit from their services.

For beginners, it is recommended to take advice to avoid making financing mistakes in the future. Also, the mortgage market is quite competitive and dynamic that you’d rather seek the help of someone who has experience doing business in it.

Execution-Only Mortgage

However, that does not mean that you can’t get a mortgage without receiving advice. This is what is called as an Execution Only Mortgage which is a viable but extremely limited way of securing the funding you need.

If you choose to secure an EO mortgage plan, you are expected to be quite knowledgeable about the following:

• The different types of mortgage and their interest trends
• The type of property you want to purchase
• The amount of money you want to borrow and how long you want to pay for it.
• The type of interest and rate that you want to deal with for the duration of the contract.

Also, the agent of the lending institution will ask a series of questions to determine whether or not you have sought financial advice beforehand. This way, they can help you assess if the mortgage you are about to apply is compatible to your budget.

Concerns with EO Mortgages

You will have to confirm that you are fully aware of the responsibilities and consequences that arise out of you taking a mortgage without receiving prior advice and you are consenting to undergo the application process.

Your willingness to shoulder the burden of whatever mortgage you apply for is crucial. If you later find out that you can’t fulfill the terms of your EO mortgage plan, filing a complaint and requesting a remortgage will be quite difficult on your part.

Nevertheless, the lender will still initiate mandatory affordability checks on your finances and assess you on your ability to regularly pay for the interest if you go for the Execution-Only route. After all, their goal here is to earn from the loan and they’d rather make sure that they are not making a bad investment with you.

Chapter 5: The Application Process

Applying for a mortgage is a process that involves two steps. The first phase will be the usual fact finding wherein the lender determines if you are someone compatible with the different mortgage plans that they offer. The second stage will be a more extensive investigation into your finances to determine if you are someone trustworthy enough to be handed a considerable sum of money to.

Phase 1: Introduction and Preliminary Assessment

Typically, an agent of the lender will ask a series of questions to determine what kind of mortgage you are applying for and if this suits your needs. Also, they will be asking for the usual basic information like your name, age, and address.

At this point, they may start delving into your financial background but would not get too deep with it (that comes later). What is important in this phase is for the lender to determine how much money they would want you to borrow from them.

It is also at this point of the process where you will be introduced to the concept of mortgaging with the institution. The agent will usually introduce to you their different products and services as well as the fees and payment methods that they use with their clients.

Phase 2: Affordability Checks and Other Background Investigations

Once the pleasantries are disposed, you will then be given an application form you must fill up. Also, the lender might request that you present some documents in order for your application to be considered. This might include financial statements and even your medical records although the actual requirements will be different from lender to lender.

Once you have submitted all that was requested of you, the lender will then initiate the proper fact finding process which will include an affordability assessment. Here, the lender will take a look at your statements to get a rough figure of your average income. They may also would like to establish your spending patterns.

Stress Points

One key factor that lenders usually look out for are “stress” periods in your financial reports. This will be the stretches of time where your finances will be at their lowest while your expenditures are at their highest possible levels.

This is something that is unavoidable in most people as there will always be periods when a person finds their income to be inadequate to their expenses. However, what lenders are looking for are an applicant’s ability to quickly recover from these periods at the very least or maintain a bit of stability with their finances during these periods at most.

Your Credit Report Score

Lenders will also take a look at one of the most conclusive pieces of evidence regarding your finances: your credit report. If they get a hold of your report from your credit agency, they can get a clear view of your most recent financial performance.

Obviously, applicants with a favorable credit report rating will have fewer problems in getting their applications approved. Alternatively, if your credit report is less than ideal, you will find your application taking longer to be processed or rejected outright.

Another factor that lenders would like to determine is if your finances are able to adjust to the presence of a new obligation I.e. the monthly payments with interest. They would like to know that your ability to repay them does not diminish even if the interest rates rise, depending on your mortgage plan.

Phase 3: Approval and Acceptance

If you do pass all the checks of the lender, you will then be given a binding offer as well as documents explaining the terms of your mortgage. This will also initiate what is called as a “reflection period” where you get the chance to weigh in on the implications of the mortgage before signing the contract.

Lenders will usually give you a 7-day reflection period so you can make the best possible investment decision. During this period, the lender can’t change or withdraw their offer except if expressly allowed in the terms of the mortgage. Also, you have the right to waive this period to speed up your application.

Once the period is over and you have made your decision, all that is left to do is to sign the agreement. You will then receive the amount of the mortgage within a few days or weeks, depending on the lender.

Chapter 6: Deposits (and Why The Amount Matters)

Before you can get the full amount of the mortgage, you will have to pay for the deposit. This is to ensure that a chunk of your money actually goes to paying the property you would wish to purchase.

Depending on the lender, you might have to deposit a fixed amount or a percentage of the property’s total value. Also, the kind of mortgage you applied for will determine the amount you have to deposit.

Whatever the case, the amount you will deposit will affect your interest rate. The more of that total amount of the loan/property value you will pay right from the start, the lower your interest rate will be.

What’s an LTV?

You might hear of something called Loan to Value when applying for your mortgage. This might sound intimidating but how LTV works is actually quite easy. It is simply the amount you own outright contrasted to the amount that you secured through mortgage.

For instance, if you plan to purchase a property valued at £500,000 and you deposited £50,000 which is 10% of the total amount, the LTV is for the remaining amount would be 90%.

Thus, the mortgage you will have to apply for is for the coverage of that 90%. This, in turn, becomes the LTV of your mortgage.

Naturally, the interest rate of your mortgage decreases if that LTV is at a lower percentage. This is because the lender has to take a lesser risk since the amount you are asking for them is lower.

How LTV Works

Say, for example, that you already down-paid £150,000 which is 30% of £500,000, then the mortgage you will need is to cover 70% of the property’s price. This means that the LTV for your mortgage is lower as well as your interest rate.

In most cases, you will find cheaper interest rates if you can pay at least 40% of the total amount. This is regardless of the kind of mortgage you applied for and their interest rate computation scheme.

Tip: If this isn’t your first-time buying a home, you could use the equity in any of your current property towards paying the deposit of your new property. This way, you don’t have to spend a lot of time generating the funds to pay for the deposit.

One Important Note

However, this will only work if you have a clean title of ownership with that property. In layman’s terms, that means that that property has to have no outstanding obligation like overdue taxes or delinquent payments.

As such, before you even think about purchasing a new home, make sure that you start on a clean slate. Paying all your outstanding obligations will not only help in securing that deposit but will also prevent problems arising from your mortgage application.

In Conclusion

If you meet all the requirements of the lender and follow the application process properly, you should get the funding you need to purchase that new property.

Now, all that is left to do is to deal with all the obligations and interest that comes from securing that loan. This, in itself, will be a challenge that spans years to even decades.

And to fully deal with your obligations up until the last payment, there are a few aspects about financing and debt management that you also have to learn.

Bank or Broker? What to Consider when Looking for a Mortgage

For most of us, we think that finding the right place to call home is the biggest challenge in looking for a new place to live. What you may have not been aware of is that this is just the first hurdle to clear.

If you have found a prospective place to call home, the next objective to clear is securing a mortgage. Aside from checking which mortgages are available to you. Depending on how good your credit score is, you also have to iron out the issue of who you will have to deal with for the mortgage.

For mortgages and products similar to this, your only option would be either a bank or a mortgage broker. And this does beg the question: where should you secure your mortgage with? Just remember that either option is viable. Forr the option that will truly meet your needs, you will have to look at some few considerations.

How do Either of them Work?

Does it really matter where you get your mortgage? It does and it depends greatly on what you need and what you are willing to put up with.

Both brokers and banks actually follow strict guidelines in dealing with customers. If they are lenient with how they offer mortgages to prospective lenders, their ability to profit from the loan will be compromised.

In essence, you have to remember that these lenders adhere to a strong sense of structure in conducting their work. As such, you can expect for your transaction with them to follow a process which, in turn, gives you an impression of how good of a deal you are going to get with them,

As far as sourcing for their funds are concerned, banks are self-sustaining. In essence, they use their own money to fund whatever mortgage they close with their clients.

Structure-wise, all mortgage advisors, processors, underwriters, and every other person important to the mortgage transaction process work for the same entity: the bank. Upon funding, the loan will either be kept as part of the lender’s portfolio or it can be sold to investors.

Making all of this happen are the mortgage advisors who keep funding in high supply for the bank. They get most of what they earn from originating loans. This also means that their prices are mostly non-negotiable.

Aside from this, these advisors can only sell the products that their employers have currently available. This means that your options for a mortgage are relatively limited with banks.

Despite having non-negotiable prices, however, mortgage advisors coming from banks can offer the same mortgage at various price points.

Brokers

Our idea of a mortgage broker an independent sales agent selling all kinds of products coming from different lenders. Despite their smaller siz and influence compared to a bank, however, a broker has more options to offer.

Brokers often work with wholesale lenders who send rate sheets listing products and rates that would-be lenders could choose from. What is important to remember , however, is that a broker may offer rebates in their pricing especially for expensive mortgages. This will be used to pay off the broker’s commission and other costs on behalf of the borrower.

If the rate is lower, the only extra cost you would have to consider is the broker’s commission which is a minor fraction of the entire loan amount. Regional differences aside, the standard is always 1% across the world.

Pros and Cons

If you choose to deal with a bank, here are some of the advantages that you would possibly benefit from.

Easier Application Process

Throughout the duration of the loan, you will deal with the same department unless something outside from the mortgage itself would tell otherwise. This should gives you more control over the payments.

Less Onboarding

Since you likely have your current account and savings account with the bank, you are already their customer. This means that the requirement to identify yourself again or produce bank statements will reduce.

Low Pricing

When it comes the price, it is important to remember that you as the mortgagee would deal the most with interest. This means that banks offer generally low prices plus interest.

Experience

Banks have a larger combined experience compared to brokers in terms of providing products that the mortgagee would need and can manage. They can take their time in understanding what you need and negotiate the best possible terms with you.

This is because banks are essentially self-sufficient when it comes to funding. Except for dire circumstances, they won’t need to hurry up the negotiation process with you. All that matters is for you to sign with them which furthers the relationship that will be most definitely profitable for the bank. The general aim of the bank is to have a long-term relationship with you. In essence, they will become your one-stop shop for all financial events that happen in your life.

But with every advantage comes an equivalent disadvantage.

Lack of Transparency

A bank is not required to tell you how much they will make off you for your mortgage. If you are not careful, you might end up paying more for the mortgage and you wouldn’t even suspect it.

Limited Offerings

The product library offered by a bank’s mortgage advisor will be limited to the things that are affiliated with the bank. At best, you can get a handful of mortgage options with the bank as opposed to an entire portfolio’s worth of mortgage plans offered by a broker.

Stricter Approval Process

A bank can still reject your application even if you meet all the requirements. A person with an inferior rating but has been the bank’s frequent client will have an easier application process.

This boils down to the bank’s own prerogative or their in-house policies. Perhaps they consider other factors aside from your credit score or perhaps long-time customers get preferential treatment. Either way, your credit score will not only be the deciding factor to your application.

For brokers, they also have their own set of advantages unique to their setup. They are the following

Wider Selection

Since they are independent, brokers give you access to the offerings of multiple lenders. Instead of moving from one lender to another which takes time, you can get to view multiple products from multiple wholesale lenders at the same time.

The chances of you finding a specialized mortgage plan that meets your needs and your payment ability is higher with a broker.

Negotiable Prices

As far as pricing is concerned, brokers seem to be the more “customer-friendly” option. Brokers actually set their own profit margins and have payment terms that are easier to negotiate with.

Not only will you have better chances of finding a good deal, you can make that mortgage plan even better for you.

Transparency

If you wonder how much brokers are going to earn from the deal, they are required to tell that through the statement. Also, the law requires brokers to ell you exactly why the pricing for your mortgage plan is like that and that will include the percentage of their commission.

For brokers, their disadvantages include:

Less Procedural Control

Since a broker never works for the lender, they have little to no control at all at how long the process will take or how complicated it could get. For example, if you secured a deal with a broker and the broker submits your application to the lender, you might think that all is well and good.

However, just because you meet the broker’s requirements, it does not mean that the lender will easily approve of your application. There is a chance that they will put your file in their folder and forget about it. And there is nothing that you and the broker can do about it.

Complexity

With a broker, you are not dealing directly with a lender which means that you are adding extra steps to a process that is already fraught with complexities. And, of course, the added complexity does increase costs in the long term.

Longer Closing Time

Due to the multiple extra steps, there is no exact assurance that your mortgage would be approved within a few weeks or a month. This is not actually a problem if you are not in a hurry. But what if your circumstances force you to run on a tight schedule.

Let us say that you are planning to buy a house and you must close the deal in a month or so before the offer is passed to another buyer. If you seek a mortgage from a lender, there is no assurance that that mortgage will be approved within the short time table.

Which one Should You Go To?

There is no rule of thumb as to which funding source you should consider for your mortgage. A bank or a broker might be applicable for your case if certain conditions are present.

A bank is the best option for you if you are looking for a simple loan and have a good credit rating. On the other hand, a broker is good for you if you are looking for a very specific mortgage and have a subpar rating.

For example, a broker with a credit rating of 600 will not have a lot of mainline options. A broker, however, might help them secure more manageable loans with easier repayment terms. They know which lenders are lenient to applicants with poor credit scores and will most likely approve of your application.

In essence, in deciding if you should head over to a broker or a bank, ask yourself this question: what do you value the most out of the application process?

If you find value in a more secure process with minimal variables, then the bank is your best option. But if your case requires for you to look for a more lenient funding source, then a broker is your best option.

Either way, it is best that you obtain quotes from at least 2 to 3 brokers and banks respectively before you make your decision.

Your Credit Score and How it Affects Your Mortgage Rate

It is natural to want to get the best mortgage rates. To get a good rate, there is a lot that you can do which involves getting referrals or saving for the deposit. But these will not be enough.

Your credit score will actually lend a hand in you getting a good mortgage rate. This does not exactly mean that you won’t be paying a lot in interest fees over the lifespan of the mortgage. A good credit score can make your repayment manageable in the long term.

As such, it is important that you must understand how your credit score affects your ability to secure loans like a mortgage.

Credit Scores and Loaning

Your credit score is a critical factor in determining the range of mortgage rates that are available to you. To understand why your score is important, it is best to look at things from the lender’s perspective.

To you, a loan is just a huge sum of money that you can use for a lot of purposes. For the bank, however, that loan is their investment on you.

Depending on the terms of the loan, that mortgage will be payable by a decade or three. Over that time, a lot of things can happen like you changing jobs, you losing money, the neighborhood you live in changing, the market fluctuating, and other considerable yet critical changes.

Why Does Your Score Matter?

There is no exact way of determining if you are a safe investment just by an interview. This is where your credit score comes into play as it tells a lender whether or not you are trustworthy.     This is because a credit score will be reflection of your financial habits.

A lot could happen in the duration of your loan. Your assets could depreciate and you could lose your high-paying job or lucrative business. The ability to make sound financial judgements is a far more consistent criterion.

The Problems of a Low Score

Actually, low credit score applicants are not the only ones to find a mortgage difficult. The best mortgage deals is actually the difference between a good score and a great one.

Here is an example. Two people apply for the same mortgage. One person has a 760 credit score and the other has a score of 660. If their applications are approved, the person with a better score gets a 0.4% better mortgage deal.

The 0.4% difference might look insignificant but it does add up. The mortgage with a 0.4% better deal will save money by the hundreds to thousands.

How Scoring Works

It is important to review how the credit scoring system works as far as your mortgage rates are concerned. For this example, let’s use Experian which uses a range from 0 to 999 . Obviously, your risk to the lender inversely proportional to the range of your current score.

In essence, 0 to 560 I very poor, 561 to 720 is poor, 721 to 880 is fair, 781 to 960 is very good, and 961 to 999 is exceptional.

What is a Good Score for Buying a House?

Lowering your interest rate is actually still to the lender’s discretion. On the other hand, a difference of a few points in your credit score can affect your monthly payments substantially.

If you have a score at the Very Poor range, your mortgage application will be declined by lenders ASAP or, alternatively, you will find it harder to get a good rate with a manageable interest rate.

The poor range allows for basic mortgage deals with high interest rates. As such, careful selection and contemplation is needed before you sign off on a deal if your score is in this range.

At the Fair level, you can start getting good deals for your mortgage. The prices might be lower and the terms longer and the interest rates are more reasonable, giving you enough of a time to clear off your debt without paying essentially more on a monthly or annual basis.

The Best Range

If you hit the Good range, you start getting quite a lot of good mortgage deals. Offers at this range are more manageable on the long term with pricing options more favorable to you.

Conversely, a credit score at the Excellent range allows you to be first in line for rather good mortgage deals with interest rates that are the lowest in the market.

As such, it is best that you aim to get a score by the 721 to 880 range at the very least. The point is that a higher credit score means that you will only have to pay a minor fraction of the loan’s value in interest for the duration of your indebtitude to the lender.

Improving the Odds

As was implied, getting a low credit score does not immediately make you a bad investment option. It only means that anyone who is willing to lend you money is going to put you through the task of clearing your debts as quickly as possible and deal with a high interest rate.

By locking you to a rate that you would find difficult, they are at the very least putting a “security” over their investment on you and, in the end, make money off it.

Here is the problem: a low credit score is all too common in the UK these days. As a matter of fact, those who relatively young credit lives or are new to the country tend to get low scores.

Only keep in mind that lenders want to know that you can be relied on to fulfill your financial obligations on a regular basis. As such, your best remedy here is to improve your score by making some important lifestyle changes.

Frequent Payments

Paying your dues is one of the best methods to improving your score. This will include every debt, subscription, service, and membership you have entered and requires a regular payment. Even how often you pay your utility bills and even your landlord (if you are renting space) will matter here.

Timing

If it can be helped, try to give enough time in between your credit applications. The reason for this is because an inquiry is always made when you apply for new credit.

A hard search on your credit information done every 6 months is harmless. On the other hand, multiple ones done in a space of a few months can give the impression that you are becoming too reliant on credit. If mortgage providers see this, they are given the impression that you will barely manage one other obligation your already considerable list of debts.

Registering to Vote

Becoming registered on the local electoral register does give the impression to lenders that you intend to stay in one place for a considerable period of time.

By registering in one, you give the signal to lenders that you are there to stay and will not flee from creditors if your debts are due.

Staying within the Limit

This piece of advice is often misunderstood by many credit holders. Staying within the limit does not exactly mean cashing out on 99% only on a regular basis. Credit activity at that range is quite high which can negatively impact your score if done regularly.

There is no hard and fast rule as to how below the limits you should keep your spending with your credit. If you are aiming for the 800 to 999 range, it is best to keep your spending limits within the 25% mark. This, combined with other sound financial habits, should leave you with a score good enough for a good mortgage deal.

One other strategy you could use is making sure that your information contained in your report is accurate. Sites like https://creditscoreonline.co.uk can help you get a copy of your score from any of the major reporting agencies in the UK as a reference. You can use their services to check if the information being presented to lenders is correct or use it yourself and get an idea on how you could improve your score.

To Summarise

What a low score only means is that the lender will be more careful with you and make sure that you will uphold your end of the bargain by introducing some constricting terms in the contract.

A good score, as a matter of fact, gives the impression to lenders that you are a safe investment. If you have a score within the good to excellent ranges, you might even have an easier application process.

To summarise everything, your credit score will determine how good of a mortgage deal you can get from lenders. As such, it is recommended that you make a good impression when you present that application.