The mortgage broker is uniquely placed to source and advise first-time buyers on the best mortgage loan for them. Finding that product takes time and careful analysis, much of which concerns the expectations and attitudes of the borrower, as well as the variety of products on the market to choose from.
First time buyers have special needs when selecting their mortgage. They will not have had the pleasure of sifting through all the products on the market, nor be alert to the considerations they need to make before taking out a mortgage. In fact, most are relieved to be even offered a loan and their selection process frequently starts and finishes with the best interest rate they can find.
This probably explains the number of mortgages switched after five years, the number of borrowers experiencing debt and the number of borrowers saddled with loan packages which have tied them into unmanageable rates and unnecessary and/or expensive associated insurance products.
Borrowing figures do, however, reflect an encouraging trend in the house buying market. More borrowers are saving for a deposit before they buy, suggesting a more responsible attitude to borrowing. According to Halifax, the average mortgage loan is £63,600 and the average loan to value is 86.7%. On average borrowers are placing deposits of £8,459, well over 10%.
Mark Hemingway, press office manager at the Halifax, says: ‘At the end of the 1980s, first time buyers found it hard to get into the housing market and 100% mortgages were commonplace. But by the late-90s more borrowers were coming forward with deposits saved. The risks of getting into the market were less and those borrowers coming forward with deposits of 10% or more were also avoiding the mortgage indemnity premiums levied by lenders.’
Debt dangers cannot be ignored, however. A recent report from the Consumer Credit Counselling Service has revealed it is home buying that places couples at the most risk of debt. The report found a median debt-income ratio of 44.27 for homebuyers with monthly net income below £500. As this level of income is unlikely to be sufficient to raise a loan, this suggests an unexpected fall in income since the loan was taken out, due to perhaps one of the partners losing their job, or having to stop work due to pregnancy. This emphasises the importance of borrowing not just within actual financial limits, but also potential limits. It also highlights the important role of the mortgage broker in advising a client on how and how much they should borrow. The first challenge for the adviser is to ween the client off choosing on rate alone.
It appears that many borrowers are attracted less in the current economic climate to fixed and discounted rates, taking their chances instead with low interest rates generally. At the end of 1998, over 50% of mortgages were on a fixed rate basis, while this number had fallen to 28% at the end of 2000, according the Council of Mortgage Lenders (CML).
This said, a lender’s applied interest rate will always be the first focus for a borrower. The simple re-focus measure for the adviser to apply is therefore a calculation of the overall cost of their borrowing. This will sober the borrower into the enormity of their undertaking and the importance of selecting carefully.
As many mortgages targeted at this market offer initial discounts, the second figure they should be shown is the overall payment figure based on the standard variable rate that they will invariably be switched to once the initial offer period is over. This will be horrifying enough for them to gratefully put themselves in your hands as the one to lead them to the other side of the mortgage minefield.
Take, for example, the following example of the average mortgage loan (according to the Halifax) of £63,600 taken over 25 years at an initial discounted rate of 4.99%. Over that term the borrower will pay £142,941 in total. As the client is bravely swallowing that one, pop over the amount they will pay when they are switched to a SVR of, say, 7%. On the same criteria as above the total repayment will be £174,900.
This helps to focus the borrower on the costs of their borrowing. While a lower initial rate of borrowing or a discounted rate will be attractive in the early years of a mortgage when other costs of buying a home ‘ such as search and legal fees have to be met, the transfer to a standard variable rate of interest should not be ignored.
The annual percentage rate (APR) is the tool lenders apply to help borrowers assess their borrowing costs. The issue of APR is less contentious than it was, as a standard form of calculation now applies throughout the industry. The client needs to know that the interest rate used to calculate their monthly payments may change, unless they are on a fixed rate. Lenders must also quote the APR when advertising a loan, which takes into account the applied interest rate, and other costs associated with the loan, such as administration charges and the term of the loan. Beyond the applied rate which has attracted the borrower to a particular mortgage product, the APR is intended to help them to compare the costs of their loan to that offered by other lenders.
Beyond interest rates, selecting a first mortgage also depends on the attitude of the borrower to borrowing. Are they prepared to take a low initial rate and accept a higher rate later on, or will they accept redemption penalties and re-mortgaging costs in a few years time? For many, the security of consistency is more important than a lower interest rate. Alternatively, does the compromise route of the capped and collared rate where the borower knows the rate of interest they pay will not fall below or rise above a certain rate, appeal?
The way borrowers choose to pay off their mortgage has also changed. Perhaps not surprisingly, considering the impact that the climate of low interest and low inflation has had on endowment policies, borrowers are drifting away from this form of mortgage repayment towards capital and interest methods of payment.
There has been an increase in standard repayment mortgages from 49% at the end of 1999, to 62% in the last quarter of 2000, according to the CML. Endowment mortgages have fallen from 26% to 18% over the same periods.
The hidden catch
Once a broad decision has been made as to an acceptable application of the interest rate, the other hooks and hindrances of the product must be considered. A borrower who knows they are likely to want to remortgage at the end of the initial discount period will need to pay special attention to redemption penalties and balance these carefully with the incentives offered by lenders to attract those wishing to remortgage. These incentives may include refunds of valuation and legal fees, waiver of the mortgage indemnity premium, rebates on completion and free insurances for an initial period.
Associated mortgage insurances are another key area of advice for the broker. As a rule of thumb, no borrower should automatically take out an insurance policy with their mortgage provider. Life assurance, critical illness and building and/or contents insurance should always be viewed as separate but related insurances, and should be reviewed and sourced as such.
A broker will spend the most part of arranging a mortgage in consulting and explaining all the above. Once these decisions have been made, with the array of mortgage sourcing systems on the market, the search process should be relatively straight forward.
But it is not always the case for first time buyers. Perhaps it is good news for mortgage brokers that despite the array of mortgage sites available to borrowers, first time buyers still prefer to seek advice before taking out a loan.
Simon Nixon of Mortgage 2000 confirms that of the 200,000 searches to www.moneysupermarket.com each month, only 1% of take-up is through first time buyers.
‘The rest go through brokers,’ says Nixon. ‘They do not have the confidence to buy online, they may search to assess the market, but then go to a broker. And we advise first time buyers to do that.’
Unfortunately, it seems mortgage sourcing systems are not always an energy-saving solution for the broker. One south London mortgage broker, who has been advising since 1971, finds it frustrating that he has yet to find a system that will allow him to key a client’s information in once and have the information remain in the system while he searches for the right product.
‘Even for first time buyers who generally just look for a 95% to 100% mortgage, there are so many matters to consider that if you find a potential product you still have to phone the lender,’ he says. ‘I want a system where I can get a result quickly, but no system has done it for us yet. The broker still has to do all the leg work.’
No news there for the many market-scarred brokers. But the place of the independent broker is still key. And the search for the best product, still time consuming.