Three massive mortgage dilemmas solved

What difference does a mortgage broker actually make? Donna Ferguson investigates.

I was eating my lunch on the sunny roof terrace of lovemoney.com towers last week, when I was joined by one of our mortgage brokers, Nick Cooper. Me being a mortgage journalist and Nick being, well, extremely knowledgeable about mortgages, we inevitably got to chatting about the mortgage market.

Nick’s job is to help lovemoney.com readers who use our fee-free mortgage service to get the best mortgage deal - which sounds easy enough, but with mortgages, “the best deal” can’t simply be found at the top of a table. It changes depending on who is asking.

For example, the best deal for a first-time buyer with a small deposit is not the same as the best deal for an existing homeowner with a huge amount of equity.

But if you’re a regular reader of lovemoney.com, I’m guessing you already know this. After all, one of the aims of this illustrious financial website is to help you to understand mortgages, by yourself, without always needing to consult a broker.

So I asked Nick: What difference does a mortgage broker actually make? His response was to tell me about three typical mortgage dilemmas, facing different types of lovemoney.com readers at the moment, that he helps to solve every day. See what you think:

1) The well-off borrowers’ dilemma

A well-off borrower has a lot of equity (say 60%) in her home and is torn between trackers and fixed rates. What would be the best option for her?

Nick says...

“It is difficult to say what the best deal will be in advance, because the answer depends on when the Base Rate rises. Current predictions in the market are that the Base Rate will remain unchanged or at least extremely low for about three years.

“In my view, a lifetime tracker is a good idea if you are happy to take the risk that rates could rise suddenly and you are prepared to pay more - or quickly remortgage to a fixed rate - once they do.

“However, if you are the cautious type and prefer to pay more now for peace of mind, then a five-year fixed rate could also be a good idea. These rates are extremely competitive right now, plus you will save the fees involved with remortgaging every few years - and avoid the inevitable Base Rate hikes in the future.”

What’s the best deal for this borrower right now?

“Woolwich are currently offering a 2.89% lifetime tracker (Base Rate plus 2.39%) that I like. It has no arrangement fee, a free legal service and valuation, and gives you £300 cashback. But if you want peace of mind, you can pick up a five-year fixed rate for just 3.6% with a £199 fee from Coventry Building Society. That’s one of the cheapest overall fixed rates I’ve ever seen!”

2) The first-time buyer dilemma

A couple of first-time buyers have a small deposit - say 5% or 10%. What can they do? Can they still get a decent deal and if so, what type of deal should they go for?

Nick says...

“Many first-timers believe that in order to get a mortgage nowadays you need at least a 20% deposit, but this simply isn’t true. You can still get on the property ladder with a 5% or 10% deposit. 

“But remember, as well as your deposit, you’ll need to have saved up some extra cash (at least £1,000) for things like solicitors fees, surveys and other moving costs.

“Once you’ve subtracted these costs, you’ll know exactly how much money you can put down as a deposit. The next step is to work out how much you can afford to borrow, which means figuring out how much money you can afford to put towards your mortgage payments each month. An easy way to do this is to use an online spend tracker which allows you to see how much you spend on different things each month, or a broker like myself can help you figure out your monthly budget over the phone.”

Which current deal is best for first-time buyers in this situation?

“Skipton Building Society is offering a highly-competitive two year fixed rate at 5.99%, which is a good deal for first-time buyers who want stability. There’s no arrangement fee, just a £195 application fee and you only need to put down a 5% deposit.

“On the other hand, if you are happy to take a bit of a risk and you have some slack in your budget, then my pick is HSBC’s tracker rate at 4.69% (Base rate plus 4.19%). This tracks the base rate for the entire term of the mortgage, with no penalties to pay if you want to remortgage to a new rate at any time."

3) The struggling borrower’s dilemma

A young family wants to remortgage to a bigger property. They’ve found a great deal but the lender says they can’t afford it. What are their options? Can they still get the deal?

Nick says...

“Long gone are the days when a bank would simply multiply your annual salary to determine how much you can borrow. Nowadays, each bank uses its own ‘affordability calculation’ to figure out how much you, as an individual, can afford to borrow, taking into account all your incomings and outgoings.

"If, after you’ve applied for a deal, your lender says you can’t afford it (and you think you can), there are a few things a broker can do to try to ensure you still get the deal you want.

“Firstly, a broker will make sure you are declaring all of your income. A lot of banks will not only consider your basic salary, but will take into consideration things like overtime, bonuses, tax credits, Child Benefit or rental income from buy-to-let properties. The key thing is that this extra income needs to be relatively sustainable throughout the mortgage term.

“Secondly, try to pay off any outstanding debts that you can afford to get rid of. With some lenders, even the smallest of credit card or loan debts will dramatically affect your ability to borrow. A broker will know which ones are like this.

“Finally, a broker can help you negotiate extending the mortgage term. This will reduce your monthly costs and so, from the lender’s point of view, the mortgage will be deemed more affordable. However, you will end up paying more interest over the mortgage term, so it’s important to do the maths before making a decision.

“One sneaky way to get around this extra cost is simply to overpay each month. Most lenders nowadays will allow you to overpay by 10% a year without penalty. So you could spread your payments over a longer term, and after the lender agrees to lend to you, overpay the difference every month. That should reduce your mortgage term back to the original term you wanted.”

Speak to Nick yourself

To speak to Nick or any of our other mortgage brokers, visit the lovemoney.com mortgage centre....or pop by for a chat on the roof terrace?

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.