How much your mortgage broker is really costing you

Expensive debt, eye-watering broker fees and hefty insurance policies are beginning to weigh heavily on mortgage borrowers who never knew anything other than rock–bottom interest rates.

The cost of living crisis is suddenly making people think twice about their outgoings. But there are some outgoings still so opaque that it is impossible for the average consumer to get a grip on them.

A handful of these impossible-to-understand outgoings all lead to the same industry: mortgage brokering.

While the majority of those who work in the regulated financial advice market can no longer charge whatever they like, mortgage brokers pretty much can.

Since 2013, independent financial advisers – otherwise referred to as “IFAs” – have been unable to charge eye-watering commissions.

This change never applied to mortgage brokers, which has led to some charging nothing and others thousands of pounds for the same service.

Rob Sinclair, chief executive of the Association for Mortgage Intermediaries, says strikingly disparate fees that mortgage advisers can charge for different types of loans is a blatant “conflict of interest”.

Mr Sinclair fears it is leading to people being sold the wrong products.

Brokers will typically charge either nothing or up to around a £500 fixed fee to arrange a straight forward residential mortgage.

But this fee grows threefold if the borrower takes out a lifetime mortgage, to around £1,500, and sixfold, to around £3,000, if the borrower takes out a second charge mortgage, a secured loan on the property from a second lender.

Even bog-standard residential mortgages can carry higher fees if a borrower is deemed as ‘risky’. In some examples seen by The Telegraph, firms charge as much as a £2,500 broker fee just for a remortgage. Some even tack on a cancellation fee.

These stark differences in price have led to fears of people being recommended the wrong products – a particular worry for older borrowers who can qualify for equity release.

£4,000 to secure a second charge mortgage

Second charge mortgages are typically the most expensive product on offer.

A broker, who wishes to remain anonymous, said a client of his had applied for a second charge mortgage with another broker before coming to him in the hope of consolidating unsecured debt he feared would stop him from remortgaging.

The client was recommended a £34,000 mortgage which came with an 11.5pc broker fee of £4,000.

Under the current rules, brokers are allowed to charge up to a 12pc fee on these types of mortgages. It is typically justified due to the fact the loan amounts are smaller, but can require more work.

In this case, the client was advised to renegotiate a better deal with a different second charge adviser. He has now managed to haggle the fee down to £2,495.

The broker who helped him secure this new deal said: “While it’s still a high fee,  the fact he was able to pay £1,500 less just through a different broker for the same product is crazy.”

When a broker arranges a mortgage, they receive both a fee from the client – if they charge one – and a guaranteed procuration fee from the lender, which is typically 0.4pc of the loan value.

So on a £250,000 mortgage, a broker receives around a £1,000 fee – regardless of what the borrower pays.

Mr Sinclair fears the price differences could influence the product recommended to the buyer.

This is particularly a worry for older borrowers who can qualify for equity release after the age of 55, an industry which has received close scrutiny from the financial watchdog and the Advertising Standards Authority.

Mr Sinclair said: “A standard mortgage might fit them, but then a lifetime mortgage might be picked instead because ten times the amount can be earned.

“We have to make sure that firms aren’t partaking in product bias because of the amount of money they can earn.”

The Financial Conduct Authority (FCA) told The Telegraph it was “looking closely” at the second charge mortgage market to better understand broker fee models and whether these provide fair value to customers.

A spokesman added: “Where firms are not consistently meeting our requirements, we will take action.”

Hidden loaded premiums of up to 40pc

Another area of the mortgage industry that the FCA is taking a closer look at is loaded premiums. When a customer takes out a mortgage, they are typically offered a form of protection – another word for insurance – be that life cover, critical illness, or a combination of both.

The premium they pay will determine the amount of cover they can get. Some brokerages use insurance panels which load that premium, charging an extra percentage of the policy assured on top.

This loading is then shared between the reinsurer, insurer, the network the broker is a part of, and the brokerage – on top of their commission or fee. 

Brokers who have previously worked under firms which sell loaded insurance premiums say it can be anything up to 40pc, and that it leads to customers being underinsured. This is because the loading dramatically eats into their monthly budget.

Some borrowers are paying in the region of £200 to £400 a month in premiums, which means they could be paying an extra £25,000 in commission over the 20-year period the policy is taken out for.

Another broker who used to work at Sequence, a part of estate agency behemoth Connells, said he was never told he was charging mortgage borrowers a loaded premium.

He said: “I found out after I quoted a client for a policy and they came back with an exact replica of the policy which was 25pc cheaper. No matter what I did, I couldn’t match it. After that, I realised every single policy we did was loaded.

“I don’t think brokers in big firms are even aware of it, and it’s definitely not disclosed to clients. This was one of the reasons I left.

“Firms will say the loading is so they can upskill their advisers, but that’s not correct. They’re just taking more profit.”

Connells did not respond to an approach for comment. The Telegraph understands other firms and networks including Quilter, Mortgage Advice Bureau, Stonebridge, Openwork and LSL estate agencies all use insurers which load policyholders’ premiums.

Insurers also have a part to play. Insurers adding a higher commission to policies not commensurate with the benefit the adviser provides are likely breaching the FCA’s rules of fair value, the Telegraph understands.

The Mortgage Advice Bureau said together with the insurers, they assess the price paid by the customer against the extent and quality of the service provided.

A spokesman said: “One of the key elements we consider as part of this is the propensity and likelihood for our product providers to properly look after customers in the event of a claim. All too often, the narrative is about how cheap premiums are, but fundamentally this is only one part of a wider set of important considerations.”

A spokesman for Quilter Financial Planning also said that their protection advisers were highly trained experts in the field.

He added: “Clients also benefit from a range of exclusive benefits such as practical advice and emotional support to help them cope with their experience of illness, disability, trauma or bereavement through Red Arc, and a tele-underwriting service with trained nurses helping to streamline the application process.

“For this reason, there is a premium enhancement which is set by our provider partners but we contractually set this to a maximum of 10pc.”

Clients should have been recommended longer term fixes

The Financial Ombudsman Service’s latest data shows in the first quarter of this year, it received 1,672 mortgage complaints – up 18pc on the same quarter last year.

Consumer complaints firm Jencap Partners has noted an uptick in brokerage firms receiving complaints from clients who say they shouldn’t have been recommended two-year fixes instead of longer term fixes while rates were at rock bottom.

Interest rates fell to historically low levels in 2021 as a handful of banks launched sub-1pc deals and the average two-year fix dropped to roughly 2pc.

Two-year fixes were around 0.3 percentage points cheaper than five-year fixes on average in November 2021, according to analyst Moneyfacts.

In 2021, over half a million borrowers took out two-year deals, figures from UK Finance, the banking trade body, show.

Those that took out two-year deals and who are now up for renewal are facing repayments double or triple the size of what they signed up for – many simply say they cannot afford it.

Because two-year fixed-rate deals come around for renewal over twice as often as five-year fixes, brokers essentially get double the money for recommending shorter fixes.

Jencap said the complaints it has advised brokerage firms on have now been handed over to the ombudsman and await a case handler.

But it fears that if the ombudsman rules in favour of one of these customers, it could lead to the next mis-selling scandal.

There is a widely held belief among brokers that no claims of this type will be upheld by the ombudsman. This is because of the paperwork advisers file alongside their recommendations, which cover them for all options – even if one was sold harder down the phone.

This means the level of evidence complaining customers have to overcome is automatically higher.

Michael Young, a legal director at negligence specialist law firm Lime Solicitors, previously told The Telegraph that the system is “stacked against the consumer”, so few firms will take on mortgage negligence claims on borrower’s behalf due to the likelihood they will lose.

Nevertheless, the ombudsman says consumers who took out a two-year deal before rates shot up should complain if they believe they were given bad advice.

An adjudicator would weigh up what the consumer’s needs and circumstances were at the time against the actual advice given, as possible movements in interest rates are only one factor when considering whether a particular product is suitable.

The maximum award the ombudsman can apply for a mis-sold mortgage product is £415,000, which a broker would pay drawing on their professional indemnity insurance.