In terms of getting the best mortgage deal on your residential investment property, one could be excused for thinking that all mortgage brokers are the same.
Most mortgage brokers have access to decent sourcing tools, subscribe to marketing updates from lenders and perhaps have a mortgage desk or network partners they can run tricky cases by. Even with more unusual cases, you could very possibly end up getting the exact same quotes from different mortgage brokers.
However, there are situations where you might not be getting the best deal from your mortgage broker and in this article, I’ll explain why.
The problems with sourcing systems
Typically, a mortgage advisor enters the details of your deal into a mortgage sourcing system and the system reliably pumps out the cheapest deal available. Let’s take the following scenario:
· Limited company portfolio landlord
· Remortgaging a property worth £200,000
· Looking to release £140,000 (70% LTV) on a 2-year fixed rate deal
· Generating £1,200 per month rent
· On a standard AST and nothing unusual about the property
After entering those above details, here’s a screenshot from a mortgage sourcing system:
Lender A comes up top with an initial rate of 2.59% and monthly payments of £310.80.
Lender B second with an initial rate of 2.74% and monthly payments £326.06.
Lender C is third with an initial rate of 2.75% and monthly payments of £324.04.
There are three major things wrong with relying entirely on a mortgage sourcing system like this.
1. These systems do not source deals that may not be publicly advertised
The deals sourced may not be the lowest possible rates in the market. One of the high street banks is currently going as low as 2% over base variable or a fixed rate of 2.12% on certain residential investment deals for limited company portfolio landlords (landlords owning 4 or more properties).
Your mortgage broker may not have access to or may not be aware of such a deal.
Deals at this high street lender are priced individually according to risk (the lowest possible fixed rate of 2.12% is typically reserved for lower LTV deals) and a standardised fixed rate is not publicly advertised. This gives the lender flexibility when pricing deals, rather than committing publicly to set pricing and criteria.
Therefore, what you’re able to find on the internet or what your broker finds through mortgage sourcing systems may not be the best deal.
Additionally, on rare occasions, some lenders make exclusive deals available through certain broker networks. Again, these are not always publicly advertised (and the lender may ask the networks not to publicly advertise these deals too). Lenders have their own reasons for doing this – predominantly it’s down to the quality and volume of mortgage deals networks can send to them.
It’s therefore also possible that you may get different pricing from the same lender, when using different brokers.
2. Be careful how you determine the lowest cost on your sourcing system
If you find you’re getting deals from your broker with hefty product fees, it might be because they’re simply sorting the deals in their sourcing system by way of lowest rate or lowest monthly cost and giving no further thought to it.
In the example above, Lender A had the lowest monthly cost, but came with a hefty £4,000 product fee. The Lender C deal had a monthly payment that was £13.24 per month more expensive but had a product fee that was £2,600 less.
I appreciate that, because lenders allow you to add the product fee to the loan, it doesn’t affect your short-term cash flow. However, the product fee is an expense incurred that will have to repaid at some point (when you come to sell, for example) and for a saving of £13.24 per month (a total saving £317.76 over the initial 2-year fixed period) you would be crazy to incur an extra £2,600 in product fees for such a saving.
Plus, you’re still paying interest on this extra product fee after the initial fixed rate period has ended.
What’s more, Lender C gives £750 cashback on their deal, which is another incentive that sourcing systems sometimes struggle to factor into their calculations.
This is an obvious example where the top of the sourcing system wasn’t the cheapest. However, sometimes the difference in cost - factoring in the monthly payment, product fees, valuation and legal expenses and incentives - can be quite subtle and may involve a degree of judgement from you and the broker.
3. Other factors a sourcing system can’t handle
Variable rates and product switching
What happens at the end of the fixed rate period? How simple is it to switch product? What fees or admin is involved?
Take, for example, the two lenders below:
Lender A has fixed rate of 2.99% on a 2-year fix and a reversion/variable rate of 6.18%. To product switch after 2 years would currently incur another product fee of 0.75% and the rate on another 2-year fix would be 3.99% (higher than what it is for new customers).
Lender B has fixed rate of 3.38% on a 2-year fix and a reversion/variable rate of 4.58%. Currently, the rate on a 2-year fix product switch is 3.15%, with no fees (lower than what it would be for new customers).
So even though Lender A has a lower initial fixed rate, it could be worth considering Lender B if you’re planning to stick with the lender long term.
Of course, you can’t see into the future to review what options will be available when your fixed rate period comes to an end, but the present policy of the lender should give you some idea.
Valuation
The valuation process can be important.
There are lenders that use in house valuers, allowing you to potentially run a property past them for an opinion prior to instructing a physical valuation.
One lender can do investment valuations on HMOs in Article 4 areas, allowing you to potentially get a higher valuation on those kinds of properties.
Some lenders may take a more lenient view on a property in need of light refurbishment or repair and place a retention on the mortgage, rather declining your application outright, potentially saving you the need for expensive bridging finance.
Speed
If you can’t wait months for a mortgage offer, then this is another factor worth considering.
Some lenders are notoriously slow and pernickety with signed paper documents whilst some are renowned for their speed and ease of use.
Whereas some lenders take weeks at each application stage, this lender currently advertises their impressive service levels on their website as follows:
If a delay in securing the mortgage could cost you the deal, it could be worth incurring a bit of extra expense by going to a lender known for their speed and service levels.
Portfolio loans
Again, these are not something that come up in your standard sourcing system, as the pricing is usually bespoke to each deal.
A portfolio loan allows the lender to take a charge over all or some of the properties in your portfolio, rather than requiring an individual application for each unit.
The rates tend to be cheaper, as effectively the lender is giving you a discount for putting a larger deal through them. For example, one lender advertises rates on a single residential investment mortgage of 3.38% on a 2-year fix, whereas a 2-year fix on their multi-property product is 3.18%.
There are 4 main banks that can price a portfolio loan keenly, typically under 3%. The pricing primarily depends on the quality of properties in your portfolio, the LTV required and the rental coverage.
If you find yourself with a large portfolio, juggling with product switches on single units with lenders pricing deals at 3%+, it might be time to consider a portfolio loan - although you will have to consider any early repayment charges you might incur to get out of any fixed rate single unit deals you’re currently in.
These portfolio loans are treated as commercial mortgages and may not be available to standard residential mortgage brokers.
Broker fees
A broker gets paid in two ways - a processing fee from the lender (“proc fee”) and a broker fee paid directly from the client.
I’m not part of the Paradigm Mortgage Club, but this guide gives you some idea of what proc fees lenders pay to brokers.
On a £50,000 mortgage, if a 0.4% proc fee is payable, that means the broker will receive £200 from the lender when the mortgage completes (pretty meagre for the work involved!)
Some residential brokers choose not to charge broker fees and are able to top up any proc fees with commission from the sale of protection products, such as life insurance and income protection (which can be quite lucrative for brokers). However, on buy to let there simply isn’t the same opportunity or scope to sell protection.
A broker may also have to pay out commission to an introducer or use a packager, further diminishing their cut of a proc fee. Taking the above example of a £200 proc fee, a broker would have to be putting through a ridiculous volume of mortgage completions (not to mention all the deals that don't proceed) to earn a good living after covering their expenses, network cut, licence fees etc., hence why the majority top up by charging a broker fee.
It can be worth shopping around. Some brokers charge a standard 1% on all deals, which to me seems expensive for higher value mortgages on straightforward residential investment property. My broker fees are listed on my website as follows:
The above fees are with the caveat that if your case is complicated or requires me to go through a regulated packager, the broker fee will be higher.
I am a commercial finance broker and do not hold the regulated mortgage permissions that some lenders require (although I am CeMAP qualified, I just chose not to have the expense and restrictions of keeping those permissions, focussing instead on commercial lending and professional landlords).
I’m therefore unlikely to have the lowest broker fee on a consumer buy to let application (a buy to let mortgage for a property you previously lived in) but will have the lowest broker fee on a lend above £200k for a professional landlord (I don’t charge anything).
Finally
Price is extremely important for a property professional and getting good lending deals with low broker fees can be the difference between being a successful property investor and being one that struggles for cash flow.
Having a broker that is available and responsive, knowledgeable, with good lender relationships and the correct regulatory permissions and insurance for what you require should also be taken into consideration. Not all brokers are equal.
Please call me on 07485 724 024 or email ed.wileman@editfinance.co.uk if you have a deal you would like to discuss.
Disclaimer
I have anonymised the lenders referred to in this article as the rates quoted need to be read in the context of the full lender criteria. The information contained is correct as at the time of writing, but lenders are always updating their pricing and criteria. The views expressed in this article are my own opinions only and should not be construed as advice.