B2L MORTGAGES – UNCOVERED
Firstly, why is it so vital for landlords to find the right mortgage?
It’s a fact that the mortgage is by far the largest outgoing, dwarfing any other expense.
Therefore, if you can cut even just a quarter of a percent off the rate you pay; this can save you tens, if not hundreds of pounds every month. When you have a portfolio this can easily amount to thousands every year.
The buy-to-let mortgage industry
To operate shrewdly in any business environment you need to understand how it operates.
The buy-to-let mortgage industry has changed almost unrecognisably in the last few years from a market with a few banks and building societies providing pseudo business loans to a few established landlords to being a multi billion pound industry which makes lending widely available to a large proportion of the population.
Today over a million households live in buy-to-let properties. These property assets are worth well over GBP 120 billion and the buy-to-let sector contributes over GBP 30 billion to the economy each year. This is more than that made by all the pubs, hotels and restaurants in the country and is over four times more than the contribution from the motor industry.
At the last count at the end of 2006 there were a total of 849,000 loans in existence worth a staggering £94.8bn. (Council of Mortgage Lenders)
Are you ignorant?
As landlords how many of us really know how this industry operates?
Property Hawk as part of its mission to investigate & explain the world of buy-to-let has set about uncovering how it works. This way, the next time you need a buy-to-let mortgage product; you will understand what is really going on which puts you in a better position to ‘call the shots’.
Firstly before you buy anything, it is helpful to understand how the buy-to-let market operates. Most of us have heard of the Financial Services Authority (FSA). It was established by the Government to protect the interests of consumers and it now regulates a whole host of financial products from pensions to residential mortgages.
However, at the present time, buy-to-let mortgages are not regulated by the FSA. This is because they are classed as a commercial product. The assumption is that people operating in this sector are ‘commercially aware’ and do not need the same level of protection.
There is a trade body called the National Association of Commercial Finance Brokers NACFB which some mortgage brokers belong to. Membership is voluntary and it sets out guidelines for its members to operate within.
However, they have no direct powers to act in the consumer’s interest against anybody that breaks this code. Therefore, if you are looking at getting a mortgage, remember caveat emptor – buyer beware!
Things are not all bad. Because of this light regulation, the UK has one of the most competitive mortgage markets in the world resulting in a constant array of new and innovative products. Unfortunately, it also means that there are a few dodgy operators out there that exist legally and make money out of naive landlords.
Therefore you need to be wary about who you buy from and how the product is sold. The secret to successfully purchasing any product is to understand how the market works so that you as a consumer can make informed decisions.
This is why Property Hawk has carried out this unique research to put you fully in the picture.
Firstly it’s useful to see as consumers where we sit in the buy-to-let mortgage industry hierarchy.
In essence the buy-to-let mortgage industry has three key players:
- providers – such as building societies that provide mortgage funds and package the products;
- the intermediaries- the people that sell the products and give advice
- consumers – the purchasers of the mortgage products i.e. you and me
It is complicated in that some of the so called providers like the building societies will sometimes sell direct to the consumer and not through an intermediary. Most of us are now savvy enough to shop around amongst various providers to ensure we get the best deal. Hence we go to an intermediary such as a mortgage broker. These can be office based but are increasingly being found solely on the web.
Most mortgage providers like having intermediaries because it means they save on marketing expenses, relying instead on using agents to do the selling for them. It also means that the intermediaries can filter the applicants to ensure that they meet the lenders criteria and then deal with all the initial form filling to ensure that any application is made correctly.
The reward for all this is that most pay the intermediary a commission – typically around 0.3% – 0.5% of the loan amount. The intermediary then also generally gives advice to the consumer. In most cases they charge a fee for this; the brokers fee.
This is the basic structure of the industry, although there are variations in the business model with some mortgage companies choosing to sell direct.
Increasingly there are mortgage comparison web sites such as Moneynet or Moneysupermarket that act as the intermediary, but without offering advice. They allow the consumer to select their own products. They receive their revenue either each time a product is sold, or when a lead is passed through to the mortgage provider.
These comparison sites are often affiliated with a mortgage broker who will assist the applicant to complete an application form with their choice of mortgage or help them find a more suitable product. This broking arrangement is often provided FREE to the users with the broking organisation instead just taking the commission from the mortgage company.
How good are the current arrangements?
One of the potential conflicts with this broker based system is that brokers are unregulated but also hold a position of trust. The consumer relies on the broker to recommend the best product and not necessary ones where they receive the highest commission.
There must be frequent potential conflicts where there is very little between the suitability for a client of a number of products, but one pays much higher commission; which one would you recommend?
The other situation is that it is difficult to know how many mortgage companies the broker have access to. They might give you best advice but if they only have 5 mortgage companies on their books rather than the 50 odd out there then their advice and your choice will inevitably be limited by this.
Brokers often advertise themselves as offering ‘whole of market advice’, however this may be technically true but how many would register with mortgage providers where they receive no commission? The result is that going to a broker means that your choice is always limited it is just a case of deciding by how much and why!
It is possible to ensure that the process is more transparent and that you are indeed getting a good range of mortgages to choose from. This is by ensuring that you use one of the mortgage comparison sites to do the initial searching yourself.
Property Hawk has just conducted the most extensive survey of how to find and buy the best buy-to-let mortgages on the internet. We will publish our results in the next couple of weeks so make sure that you keep logging on.