The Costs of Mortgage Advice & Who Really Pays What: The Misconceptions
Updated: Jul 7, 2021
Getting a mortgage can be a confusing process, especially if you’ve never done it before. To make matters worse, there are many incorrect facts and misconceptions floating around to contend with, making it difficult to know fact from fiction. To set the record straight, here are 10 of the most common misconceptions, cleared up.
Misconception 1: Brokers will charge more for your mortgage than going direct
The truth: Brokers do indeed act as a middleman between yourself and all of the potential lenders that could give you a mortgage, in the same way that you buy other products from a distributor rather than buying directly from the manufacturer. However, this does not mean that you will be paying more for your mortgage if you apply through a broker. Usually, the distributor will be able to offer a much better price on the product that you’re wanting to buy than the manufacturer. This same idea applies to mortgages. Since brokers and mortgage advisors can look at each case individually, it is actually more likely that you’ll be able to get a suitable mortgage at a lower price with a broker than you would by going directly to lenders.
Misconception 2: You can get a better deal on your mortgage by applying directly to lenders
The truth: This idea would heavily depend on your credit score and credit history, being that if you don’t have a near-perfect credit score you’d be much more likely to get a better deal by applying with a broker. Some lenders will offer the same range of deals through every channel, which is called dual pricing. This means that whether you go through a broker or directly to the lender, the deals will always be the same. For these lenders, if the broker offers you a fee-free service, it means that the lender will be paying the cost of the broker’s commission instead of you.
On the other hand, many lenders offer a range of different prices and products for their mortgages. Lenders like people applying through brokers because it means cutting out the time and costs of the admin work that is involved with an application, the broker taking on the majority of these tasks instead. For this reason, brokers are often given access to exclusive deals and product ranges that would not be available to clients applying directly - an incentive, in a way. Additionally, brokers can look at each case on an individual basis, where lenders are less likely to. They spend time researching and understanding an applicant’s situation so that they can find the best mortgage deal for them.
Misconception 3: You can’t be in debt and buy a home
The truth: Yes, having debt will impact your ability to buy a home, but it does not make the prospect impossible. With the vast majority of the population carrying things like student debt and car payments, it would be unrealistic to expect that everyone who goes to buy a home will be debt-free. What matters instead is how much debt you’re carrying relative to your total income.
When lenders decide whether or not you are eligible for a loan, they look at your debt-to-income ratio. This is calculated by taking the total sum of your monthly debt payments and dividing it by your total monthly income. In order to be approved for a loan, your ratio would ideally be less than or equal to 36%. If your debt-to-income ratio is too high to be approved, you can either work to pay down some of your debts or find ways to generate more income that would consequentially lower your ratio. Don’t be afraid to talk to a mortgage advisor about which solutions will have the biggest impact for your circumstances.
Misconception 4: You can’t get a mortgage if you’ve just changed jobs
The truth: Many people think that you need to have been with your current employer for at least six months in order to get a mortgage. Whilst this may be the case for some lenders, the majority of lenders do not expect this, as long as you can prove that you have been in employment for the past 12 months. The best way to do this is to provide payslips to prove that you have had a permanent source of income for the past year and that there has been a natural progression from one job to another.
Misconception 5: The interest rate lasts for the entirety of the mortgage
The truth: In some countries, you have to pay the same interest rate that you initially agreed to for the entire length of your mortgage term. However, in the UK it is more common to change your interest rate throughout the term. The majority of mortgages will begin with a fixed term, usually of 2 or 5 years, where the interest rate stays the same. After this term is up, the interest rate can change, which is when you might want to review your mortgage. You may be able to change the product you’re on, as well as the lender you’re borrowing from, which can lead to a reduction in your interest rate.
Misconception 6: The rate you pay is based on your credit score
The truth: Whilst your credit score is an important factor when applying for a mortgage, different lenders will use your credit score in different ways. Not all lenders will base the rate on your credit score and many deem the loan-to-value (LTV) and affordability to be more important when determining the rate. However, keep in mind that your credit score and credit history are still important factors in your mortgage application, therefore it is still beneficial to try and improve them in advance of applying for a mortgage.
Misconception 7: Self-employed people will suffer from higher interest rates
The truth: There’s a common misconception that people who are self-employed will have to pay a higher interest rate on their mortgage, which may deter them from looking into their mortgage options. However, this is usually not the case. For self-employed people, as long as they can provide at least two years of accounts, there are lenders that are willing to provide the same rate to the self-employed as to those who have an employer.
Misconception 8: You need to have a large deposit
The truth: It is a common belief that you need to save tens of thousands of pounds in order to fund a deposit for a mortgage. Whilst it is still advised to save up as much as possible for your deposit, it is also very common for people to get a mortgage deal with just a 5% deposit with a respectable interest rate. It’s also helpful to keep in mind that there are multiple government schemes available that can help you build your deposit, such as ‘Help to Buy’ and LIFT, in addition to the option of being gifted part of your deposit by a family member.
Misconception 9: Your mortgage gets written off if you pass away
The truth: Many people are surprised to hear that even if they pass away, their mortgage debt is not wiped off and forgiven. Usually, in a situation where the mortgage holder dies, the mortgage debt would need to be paid back to the lender before any money from the estate can be claimed by whoever is written into their will. If the mortgage cannot be repaid, then the house would have to be sold, It is, therefore, important to think about protecting yourself and your mortgage in case the worst was to happen. That way, your next of kin would be able to retain your property as you intended.
Misconception 10: You can only get a mortgage from your current bank
The truth: Lots of people believe that the bank they currently hold an account with is the one and only place to go when it comes to applying for a mortgage. This is usually because your bank may bombard you with advertisements for its mortgage range, alongside sometimes offering preferential rates to you as an existing customer. However, with there being more than 90 mortgage lenders out there, it’s definitely worth shopping around before deciding who to apply with. Not only might other banks be able to match or offer you better deals, but there are also plenty of non-banking organisations that can provide you with a mortgage. Finding the right deal for you can be overwhelming, but a whole-of-market mortgage broker can help you narrow down your options and find the right mortgage based on your personal circumstances.
So there you have it; 10 misconceptions about mortgages, set straight. If you are looking to apply for a mortgage, contact Mortgage Thoughts today.