Buying a new house without enough cash to pay for it inevitably means getting a mortgage. Smart home buyers approach mortgages the same way they do buying houses: they shop around before committing to a deal. Shopping is the only way to look at all of the potential options.
Mortgage experts recommend shopping for home financing in the same way you might shop for credit cards, mobile phone plans, and personal loans. There are lots of mortgage deals out there – all with their own details that directly affect how much a borrower pays for the privilege of doing so. Not shopping around virtually guarantees a home buyer will not get the best deal.
Anyone planning to buy a home should understand what he or she is getting into. That includes understanding the finer points of mortgage lending. Below are the top things you need to know in this regard:
Lenders vs Brokers
A good starting point is the source of funding. Mortgages are made by all sorts of lenders including banks, building societies, credit unions, and private lenders. Some of them operate in the traditional sense. They have physical offices staffed by loan officers ready to take your application. Others work exclusively online. However, that does not necessarily mean you have to go direct to a lender to get a mortgage.
Another option is to go to a mortgage broker instead. Also known as mortgage advisers here in the UK, brokers are not actually lenders. Their main function is to bring lenders and borrowers together by matching them according to what they both bring to the table.
How mortgage brokers operate differs from one country to the next. There are three kinds of brokers here in the UK:
- Tied – A tied broker is one that represents a single lender. As such, the broker can only offer the mortgage products that a particular lender has available at the current time.
- Multi-Tied – A multi-tied broker represents several lenders. It could be two or three. Again, the broker is limited to the products offered by the represented lenders.
- Independent – Also known as whole-of-market brokers, independent brokers are not tied to any lenders in particular. They are free to shop from the entire market. This is the kind of mortgage broker you really want to work with.
Brokers can be paid a flat, hourly rate or a commission based on a percentage of the mortgages they arrange. Be sure to ask your broker about this if the information is not volunteered.
Interest Rates vs APR
The next thing you need to know is the difference between interest rates and APR. Despite what you may have heard in the past, the two are not the same. They are distinctly different representations of how much you pay for the privilege of borrowing.
Interest is the amount of extra you pay on top of the principal you borrow. Let us use some small numbers to keep it simple. Let’s say you were to borrow £100 for a 12-month term with an interest rate of 10%. By the time you finished paying off the loan at the end of the year, the combination of your principal and interest payments would equal £110. We get that number by multiplying 100 x 1.10.
The annual percentage rate (APR) is a different rate altogether. It includes interest along with all of the other fees and charges you will pay over the course of the loan. This is why APR is higher than a loan’s advertised interest rate. It also explains why APR can change over time. Fees and charges may not change, but interest rates do. Any change in the interest rate will likewise impact APR.
Advertised Rates Aren’t Guaranteed
It is not uncommon for home buyers to be surprised about the rates they are offered by mortgage lenders. You might have this quote from the mortgage broker and a different quote from the online lender represented by your broker. So why is the online quote less?
Lenders are allowed to advertise their lowest rates as long as they offer full disclosure at the time a mortgage deal is offered. What you might not realise is that the law, at least here in the UK, only requires that 51% of a lender’s customers get the advertised rate. The remaining 49% can be offered a higher rate. And guess what? That is exactly how it works.
The advertised rate is reserved for those customers with the best credit and highest income. If you are not in the top tier, you’re not likely to get the advertised rate. This is yet another reason to work with a mortgage broker. A broker has access to many more deals, making it more likely you will get a good rate.
It really does pay to shop around for a mortgage. As long as you’re going to do so, you might just as well work with a mortgage broker. You get a lot more choices along with sound advice.