… and it’s time to break the myth.
“The greatest plus point of a second charge mortgage is that a good master broker will cover all of the costs associated with a new application, should it be required, to expedite a good customer outcome. Because by the time the application has landed on the master broker’s desk, the client will already be several weeks into searching for, and not yet finding, the finance they seek. In this business speed is of the essence. Hurdles, especially financial ones, must be overcome quickly and without fuss…”
Just think about this basic concept for a minute: if I were to walk into the office of any mainstream Mortgage Broker on any high street looking to remortgage my property (let’s say I need £55,000 for a kitchen/diner extension and associated improvements) once the application had been accepted I would usually be expected to pay for an application/valuation fee in the first instance and later on the legal fees and any other fees which arose as the result of my enquiry. The broker would not pay any of those fees on my behalf, and if I were to ask for contribution, a polite ‘no’ would probably be the best answer I could hope for, which is fine.
If a suitable remortgage could not be found (perhaps due to my age, my credit status, the way I derive my income) and a different route had to be found, namely a second charge loan, my mortgage broker would be unlikely to want to tackle what has now become a specialist mortgage. They would usually refer me to a second charge master broker; they could package the case themselves, but despite lenders heavily promoting their direct channels, the specialist packaging knowledge required means most mainstream mortgage brokers still prefer to avoid the hassle and pass it on.
The important part; here is the difference between a mainstream first charge broker and a specialist master broker:
Once a credit search (£3, paid for by the master broker) and a land registry search (£4 paid for by the master broker) had been undertaken on the application, it would be fully underwritten. The adviser at the master broker would then call back and email the introducing mortgage broker with quotes, and the important matter of introductory commission for the case would be discussed before any transaction were to continue (average £1,096, paid for by the master broker on completion). Following a fact-finding call to find out my needs and wants, I would be offered the choice of being able to pay some or all the processing costs upfront. A suitable lender and product would be finalised and the relevant paperwork would be produced.
“Mortgage brokers are the greatest source of high quality second charge mortgage introductions, and quite rightly so, they want to be paid promptly for passing them over…”
Like the vast majority of clients, I would prefer not to pay anything at all, in fact I would prefer the master broker took the risk and paid all the costs, one of the key advantages of a second charge. The master broker would collect my mortgage broker’s introductory commission as part of the broker fee, to be paid immediately to them on completion of the mortgage. If I had opted to pay any of the fees up front, that amount would be deducted in full, from the broker fee.
This master broker would charge a fee of around £3,000 (5.5%) for raising the £55,000 second mortgage, which would be added to the loan. In addition to this and dependent on the lender, a commission of up to 2% of the net advance will also be paid.
Next (and unexpectedly), the adviser would agree with me a convenient date for a document courier to deliver, then take away the signed paperwork. The courier would meet me at my convenience at my home, place of work, airport or anywhere else (£150 for each visit). Arriving within a 1-hour window, the courier would scan all of my personal documents and take away all of the signed documents around 40 minutes later.
“SMG employs 7 document couriers who travel the length and breadth of Britain, 7 days a week facilitating specialist mortgage applications for 200+ clients per month at a cost of over £350,000 per year…”
From the point of making my application to the master broker to the moment the signed mortgage documentation arrives back on the desk of my adviser, barely 3 days will have elapsed. It’s impressive and efficient.
The adviser may then have to write off to my mortgage lender for a reference on the conduct of my account (around £80). This will take about a week to ten days. The adviser will deal with my accountant and my other creditors to finalise the relevant paperwork, leaving me free of worry and allowing me to carry on with building my business which is at a crucial stage of growth and requires all my time and energy.
I will be called by a surveyor to carry out an inspection of my property (average £350). It will take around a week by the time the report is received, and then I can expect the mortgage offer and the legal charge deed posted and emailed to me for signature. As my wife is a foreign national with a fairly good, but not perfect understanding of English, there is a possibility that I will need to make an appointment with my lawyer to receive Independent Legal Advice on the transaction (average £250). Luckily, the lender was happy without it and so I did not need to. The adviser will kindly offer to expedite the documents by picking up the signed legal charge and delivering it direct to the lender for completion. As I have builders will soon arrive at my property to carry out extensive improvements, anything that can speed up the application process would be greatly appreciated.
“The client can pull out of a second charge mortgage application at any point right up until the money is drawn down, at absolutely no cost to them…”
My mortgage broker will be paid direct by the master broker, so I do not have to worry about making any payments out of the funds I have received, as quite frankly I will need every penny to meet the budget of my anticipated build cost. In fact, I’ll probably be a little short.
The mortgage adviser at the master broker would receive around £350 in commission for completing the transaction.
The mathematicians among you will know that only accounts for just over £2,000, but it is important to note that the cost of keeping the lights on and the doors open and the staff in wages, pensions and coffee, as well as insuring every piece of advice and myriad other costs, comes in at £1,360 per completion; a simple matter of dividing the company’s expenses by the number of completions.
The costs incurred in processing a second charge mortgage account for over 80% of the total gross fees and commission that is generated from the transaction.
The figures quoted in the example above are taken from Y3S Loans’ trading figures covering the period from 01.01.2017 – 31.12.2017. Y3S Loans is part of Specialist Mortgage Group. The author Matt Cottle is Chief Executive at Specialist Mortgage Group.
Matt Cottle, Chief Executive Officer at Specialist Mortgage Group shares his opinion on Master Broker Fees
I do not think the majority of master broker’s fees are too high. Commission paid by lenders is only sufficient to cover a portion of costs. Specialist second charge brokers must charge broker fees to survive, that is a given. I can’t speak for other brokers but I can tell you that at Y3S Loans the average broker fee is 5.5% of the loan advance. We operate a very strict broker fee policy to ensure that customers are not over or under-charged. First charge and second charge mortgage broker fees are not comparable, the basic reasons for which are:
Second charges have smaller balances than firsts; a 5% fee on an average £50,000 second charge is equivalent to a 1% fee on a £250,000 first charge.
There are almost always problems with second charge loan applications that take time and knowledge to overcome, hence the reason it lands on the desk of a specialist second charge broker; it takes a lot more time to package a second charge than a first. A second charge application is a specialist product. Almost all mortgage packagers will introduce them to a specialist second charge broker rather than tackle it themselves.
First charge brokers expect the client to pay for every part of the application. Most second charge brokers almost always pay for every part of the client’s valuation, the mortgage reference from the first charge lender, the searches, the document couriers to expedite the application; everything is covered by the broker. The customer is always given the choice to pay any or all the fees up front, but most of the time they choose to add the fees to the loan. You would be hard-pressed to find a first charge mortgage broker who would be willing to pay out on all fees for a first charge mortgage application, but with second charge brokers it’s an expected part of the process.
First charge mortgage brokers are the single most fruitful source of leads to second charge brokers. Rightly so, they know how important they are to the transactional process and they expect to be remunerated accordingly. At Y3S Loans the average broker commission in 2017 was £1,096. If the client prefers not to pay this up front then the broker’s commission must be included as part of the broker fee.
In the case of Y3S Loans, there is less than 20% profit left over once all packaging fees have been paid.