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If you’re on the cusp of remortgaging or thinking about buying your first home, you’d be forgiven for being put off by current high mortgage rates.
For many, the difficult decision is between fixing for two years and switching to a lower rate at the end of the term, knowing you’ll be paying the same amount over those two years, or chancing a variable rate in the hope that rates will come down.
Many may not feel equipped to make this call, which is where a mortgage broker could help.
Brokers have an overview of the different mortgage deals available, and can help to find a deal that suits your circumstances.
Here, Telegraph Money explains the steps you should take before choosing a mortgage broker, whether you should pay fees, and what to do if you think you’ve been given bad advice.
What’s the purpose of a mortgage broker?
A mortgage broker is trained to understand the different kinds of mortgages on the market, and to match these products with what an individual can afford.
This means looking at your deposit, credit history, outgoings, potential future outgoings, cash flow and income, and matching your profile to the most applicable product. This can then give you an idea of what sort of rate you can afford.
David Hollingworth, of national brokerage L&C Mortgages, said mortgage advice can help you avoid simply being drawn to the lowest interest rate, which doesn’t always end up being the cheapest option.
“A mortgage adviser will take into account product fees and other costs, features and incentives that may come with a deal,” he added.
Typically, deals with cheaper rates will have bigger product fees – so adding up interest rate rate repayment differences and subtracting the upfront product fee from these savings is a good way of making sure you’re getting the best deal.
Other costs can include valuation and legal work, but not all deals include these, Mr Hollingworth explained.
He said: “Many lenders will offer an option with free valuation and a cashback bonus, or free basic legal work for remortgage, for example.”
It is best practice for brokers to present you with multiple options, showing you what interest rate you could pay on a two-year fix, a five-year fix, and a tracker.
They will then manage any applications they submit to mortgage lenders on your behalf. Many brokers are now securing interest rates on behalf of clients up to six months in advance of their remortgage date, in an effort to get them the best possible rate amidst volatile market conditions.
It is possible to take out a mortgage without a broker, and in some instances you could access exclusive deals by applying yourself.
But on the flipside, this does increase the margin for error. Filling out mortgage applications can be tricky, and if you submit inaccurate information your mortgage application could be rejected.
How to choose a mortgage broker
A good way to start looking for an adviser is to use search engines such as Unbiased or VouchedFor, which were set up to help consumers avoid the cowboys.
By finding an individual through these portals, you can sleep easy at night knowing they are providing you with regulated advice.
Just be sure to check their profile is fully verified by the portal. In some cases, advisers on VouchedFor won’t be fully certified – it’s best to steer clear of those.
It is also worth checking the Financial Conduct Authority’s company register. While a firm may say it is regulated by the City watchdog, a small minority could be claiming this falsely – so it’s always worth taking the time to search for the firm’s name or FCA reference number on the register.
There are also various mortgage networks which are directly authorised and employ brokers – both on an employed and self-employed basis – as appointed representatives to provide advice. These include Mortgage Advice Bureau, Primis, Openwork, Sesame and Tenet – among others.
However, these brokers don’t always work with all mortgage lenders, so you may not be getting whole-of-market advice.
This isn’t necessarily a problem, as the featured lenders sometimes offer cheaper exclusive deals, but there is still a chance that you’re missing out on a better deal elsewhere. It is worth having a look at the lenders these networks use, which you can request from the adviser.
To make things even more complicated, some mortgage lenders won’t deal with brokers at all – meaning you have to go to them directly to get a mortgage.
Lloyds and First Direct are two high street examples. This means no broker is “truly” whole-of-market.
How much are mortgage broker fees?
Brokers can earn two types of fees. One, which all brokers earn, is a “procuration fee”, paid by the mortgage lender if an offer is accepted.
This represents the money the lender saves on marketing, taking on the responsibility of advice – which brokers have to be insured to provide – and the time saved on packaging the mortgage application.
The fee tends to be between 0.35pc and 0.40pc of the loan amount secured. So, if a broker does an application on your behalf for a loan of £400,000, they will earn at least £1,400 as a procuration fee.
Some brokers will also charge an additional fee to you for arranging the mortgage. This will either be a fixed amount, or a percentage of the loan. Typically, fixed fees are around £500.
Lewis Shaw, of brokerage Riverside Mortgages, charges a £499 fee once the mortgage has been offered. He said fixed fees are typically charged at one of three stages.
“Some brokers will charge a fee when the application has been submitted to the lender. If the lender’s surveyor down-values the property or refuses the application that fee isn’t always refunded.
“Others charge when the mortgage is offered. The final place for brokers to take a fee is on completion. This last one is less common, and can involve a higher fee.
“This is because there’s a lot of transactions which don’t complete, so there’s more risk for the broker.”
Fees taken at the completion stage can be as much as £2,500.
Mr Shaw is of the belief that percentage-based fees will likely be erased in time, because a mortgage application involves the same work no matter the size of the loan.
On why he charges a fee, Mr Shaw said: “Often, but not always, places that don’t charge fees have to do more volume to make up for the lost income. But if I doubled my workload, I wouldn’t be able to provide the same levels of service.
“When I worked in London, I happily didn’t charge a fee because the loans were so big. Brokers tend to charge a fee for security, as not all offers reach completion.”
Rachel Dixon, a mortgage broker based in Leamington Spa, has stopped charging a fixed fee.
She said: “I think with rates becoming higher and less people having money to pay out on broker fees, who do we think clients will turn to?
“I’ve always thought I was paid really well for a job I love. I think sometimes some advisers are a bit too big for their boots. I’d rather help a first-time buyer with their cash flow than take £500 from them. It works for me.”
Brokers who charge a percentage-based fee are by far the most expensive.
Mr Hollingworth, of L&C Mortgages – a firm which does not charge a broker fee – said: “That fee could be as much as 1pc of the loan amount, so it makes sense to factor that into the overall cost as well.
“That would roughly equate to 0.50pc on the rate for a two-year deal, so it’s worth knowing that some will not charge a fee. That could save you hundreds if not thousands of pounds each time.”
Beware loaded premiums
If you are also looking to take out mortgage protection, it’s worth being aware of “loaded premiums”.
This is where a mortgage adviser sells certain insurers’ mortgage protection policies to their clients, essentially throwing it in with the mortgage deal they’ve set up.
However, these policies have higher than standard premiums, with the extra profit shared by the adviser and the insurer.
The fee can add anything from around 15pc to 30pc of the standard premium you pay. If you were paying £50 a month for a mortgage protection policy with a loaded premium, you’d be paying an extra £4,500 over the typical 25-year average mortgage term.
The best way to find out whether an adviser charges a loaded premium is to ask them. If you don’t, it will likely be charged without you realising.
Tom Baigrie, of protection specialist LifeSearch, said: “People buying protection from their mortgage broker could often save a lot of money by shopping around and talking to an independent protection adviser.”
What are your options if you think you’ve been given bad advice?
If you think you’ve been given bad advice by a mortgage broker, you can complain to the firm you received the advice from as a first step. It should take steps to help you, and conduct an internal investigation.
If you’re unhappy with the outcome of this, and have received a final response, you can then escalate the issue to the Financial Ombudsman Service (FOS). However, this is only possible if the broker is regulated by the FCA. That’s why it’s so important to check they appear on the FCA Register.
You can now receive up to £415,000 in compensation if the FOS rules in your favour. If a judge does not uphold your complaint, there is an appeal process.
This article was first published on July 26 2023 and has since been updated.