The Application: Applying For A Mortgage
Before Reading this Section
The mortgage application process could differ depending on whether you are going via a mortgage broker or directly through a lender (learn more about each option in this section).
Lenders generally begin the mortgage application process once an offer has been accepted, whereas brokers may start the application before an offer has been accepted. Therefore, depending on which you choose, you may want to jump straight to part 3 ‘Finding a Home’ before returning to this section.
In any case, once you have decided whether you are going via a broker or direct, it might be worth contacting the desired bank/broker to ask about their mortgage procedures. This could not only save time, but also help avoid any delays that might jeopardise your chances of landing a property.
By now, you’ll probably have had a scan of the local estate agents and websites. You might have a few dream properties or two in mind and may even have arranged a viewing.
Regardless of this, there’s often not a lot you could do until you get a mortgage application approved, at least in principle. You could put an offer in without this, but you may end up disappointed if you aren’t able to secure the remainder of the purchase price beyond your initial deposit.
This section explains how to go about finding a lender. You have two basic ways forward, and we’re going to look at the pros and cons of both. They are:
- Arranging a mortgage yourself
- Using a broker
We’ll also give an overview of mortgage costs and explain what is meant by a ‘mortgage in principle’ and whether you need one.
Arranging a mortgage yourself
It’s possible to arrange a mortgage directly with a building society, bank or other financial organisation. In fact, this is a path that many people take as it could offer advantages such as cutting out fees to a middleman (that is, a broker).
Conversely, you may find that the cons of arranging a mortgage yourself outweigh the pros. You may find, for example, that you have a limited choice of products to choose from, or that you don’t get the best deal available. It’s also a mistake to think that your bank or building society might give you preferential treatment, or make the application process simpler – the fact is, you’re very unlikely to receive any special rates, and you’ll have to go through the same strict financial checks as everyone else.
In short, the pros and cons of direct deals are:
- Pro – no broker fees.
- Pro – some exclusive ‘direct-only’ deals may be available.
- Con – advice is not impartial.
- Con – you may miss out on deals available only to brokers.
- Con – you have to ‘research’ the market. This might be time-consuming.
Your lender must provide you with a Key Facts Illustration document or a European Standard Information Sheet (ESIS). This tells you about any ERCs (early repayment charges) that relate to your mortgage. Your lender also has an obligation to inform you if you ask about them.
Using a broker
Until a few years ago, the direct approach was very popular. However, as the rules that regulate the mortgage market have become more complex, people are increasingly turning to an expert third-party for help. Today, over 60% of home loans are now arranged through a broker , and most experts are predicting that this figure might continue to grow over the coming years.
What is a broker?
Today, the mortgage market is extremely competitive, and it’s not always easy to understand exactly what’s on offer. This is where a mortgage broker (also called a mortgage adviser) could help. A broker is essentially a qualified expert who helps you assess the available options in order to find the best deal for your particular circumstances. A broker could also help you arrange the mortgage, once you’ve made a decision.
Types of broker
Not all brokers are the same. In fact, there are three types of mortgage broker regulated by the FCA (Financial Conduct Authority). These are:
- Tied brokers – recommend products from a single lender.
- Multi-tied brokers – recommend products from a selected range of lenders.
- Whole of market brokers – ‘independent’ advisers with access to all products on the market that are available to mortgage brokers.
Benefits of using a broker
There are several reasons using a broker could be a good idea:
- Access to all the options: the mortgage market is vast and complex. While it’s possible to do some research yourself, an independent (whole of market) broker has easy access to the widest range of options out there – fixed, variable, discounted and tracker – and could help you choose one that’s best for you.
- Saves time: a more highly regulated market means more administration. A broker might help you deal with this more quickly, and with less hassle.
- Get it right first time: different lenders have different definitions of income – for instance, pensions, investments and other assets may or may not be taken into account. Brokers are experienced in presenting your finances in the strongest possible way. Put simply, they might help prove to the lender you could afford a mortgage.
- You’re protected: your mortgage broker has a duty of care to you. They have to justify why the particular mortgage they have chosen is right for you. If their advice is not up to scratch, you could seek compensation .
- A broker is on your side: brokers aren’t on the lender’s side, they’re on yours, and they could give you access to far more products than if you went direct.
Mortgage brokers are required to be open with you about any fees or commission they charge or earn. Again, it’s perfectly acceptable and widely advised that you ask how they make their money.
Pros and cons of using a broker
- Pro – access to ‘whole-of-market‘ products via the right broker
- Pro – some deals are exclusive to brokers
- Pro – a broker does the research for you
- Con – you could only guarantee impartial advice with a broker that isn’t tied to a particular lender
- Con – you’ll have no access to special direct-only deals
- Con – you may be charged a fee
One of the key considerations for you when applying for a mortgage and choosing whether or not to go for a broker, are the costs incurred. We provided an overview of all possible upfront mortgage costs in our section ‘Knowing the Costs’. But to recap, mortgage brokers typically earn their money in one of two ways:
- Charging a fee: this could be a one-off fee, or a sum paid through the term of your mortgage (if you need to re-mortgage, move home, etc.).
- Commission: some lenders may decide to pay the mortgage broker for their efforts in putting business their way.
However, as well as these initial set-up fees, further along the line you may encounter some other additional costs. According to the Money Advice Service, these may include:
Mortgage account fee
- This covers the lender’s administration costs in setting up, maintaining and closing your mortgage. If you’ve paid this fee, then it’s unlikely that you’ll need to pay an exit fee too (see below).
- Typical cost: £100-£300.
- This is an administration fee that covers set up and maintenance of your mortgage, as well as closure of the account when you pay it off. However, if you’ve already paid the mortgage account fee (above) then you probably won’t have to pay this.
- Typical cost, where relevant: up to £300
Early repayment charge:
- If you repay all or part your mortgage before the end of the original term agreed, you may have to pay an early repayment charge. The amount charged varies from lender to lender, and is typically between 1–5%  of the value of the early repayment. You may also have to repay any incentives you were paid when you took out your mortgage, such as discounts on legal fees or cashback.
Mortgage in Principle or ‘Decision in Principle’
Because the process of arranging a mortgage could take time, many buyers obtain a ‘Decision in Principle’ – rather confusingly, sometimes also called an ‘Agreement in Principle’ (AIP) or ‘Mortgage in Principle’ before starting their hunt for a home.
As the term implies, a DIP/AIP is a confirmation from the lender that they could, in principle, be prepared to lend you the money you need. It is based on information that is a lot more basic than with a full mortgage application, and is usually a quick and straightforward process.
Nowadays, many sellers ask to see a DIP before viewing a property, as it gives them assurance that the buyer doesn’t have a poor credit history and is more likely to get accepted for mortgage.
The benefits of getting a decision in principle are:
- It shows sellers that you could, in theory, buy a property, thus strengthening your bargaining position.
- It demonstrates you are likely to have a suitable credit score on which to base a loan (a soft credit check needs to be run to generate a DIP). Hence if you’ve had credit problems, a DIP could give you reassurance about your borrowing prospects.
- It helps you to set a realistic goal in terms of the value of the property you could afford.
- Anyone could get the DIP done: it’s very simple and easy to obtain.
- No commitment is necessary: an individual doesn’t need to start a mortgage application or have an offer accepted to generate a DIP.
Having said that, there are things you might bear in mind when getting a DIP:
- A DIP is never a guarantee – the lender may ultimately decide not to lend to you.
- Some (not all) DIPs might affect your credit rating. Therefore, consider how many DIP applications you make.
- Interest rates could change in the time between obtaining a DIP and getting an actual mortgage which may affect the lender’s decision.
Aside from having a potential effect on your credit score, the bottom line on a mortgage in principle is it is free to obtain, and could give you more clout as a buyer. It could also give you more confidence when making an offer.
Congratulations! Having read though the first two parts of Beagle Street’s Home Buyers’ Guide, you should now be one of the most clued up first time buyers out there. Now, it’s time for the fun part – actually looking for a home you’ll love. But, while this process might be exciting and fun, it could also be fraught with dangers. Next up is potentially one of the most important parts of this guide when it comes to saving you money and time: ‘What to Look Out for’.