Choosing a mortgage lender involves more than finding the lowest initial interest rate. For first-time buyers, the lender’s service, approach to existing customers and flexibility can affect the cost and ease of managing a mortgage for many years. The same considerations are useful when reviewing an existing mortgage or preparing to remortgage.
Headline rates and fees
One of the first questions people ask when choosing a mortgage is, ‘How much will it cost?’ This is understandable. For many households, particularly during the first 10 to 15 years of having a mortgage, it is likely to be the biggest household cost, so it makes sense to focus on it.
Comparing rates and fees is a core part of a mortgage adviser’s work. The answer varies depending on how much you want to borrow, the mortgage term, your credit profile, the size of your deposit and the type of property you want to buy. In most cases, there is little to choose between similar types of lender on price. Market dynamics help keep lenders competitive.
This article, therefore, looks at other factors that can have a significant effect on what you pay, even though they rarely make the headlines.
Ethics
At WR Ethical, the ethics of each lender is an important part of the advice process and a real passion of ours. When it comes to presenting lender options, we will always provide an independently assessed ethical score, which gives each customer the information needed to decide which lender’s approach best fits their values. A lender’s ethics can influence a range of policies and practices that have a tangible impact on customers. Those are the factors covered in this guide.
Pricing philosophy
It only takes a few seconds to look at a rate table or use a true cost calculator to see which mortgage deals are near the top of the tables on a given day.
A mortgage is a long-term process. Typically, two to six months pass between applying for a mortgage and the rate taking effect, whether you are remortgaging or buying a new property.
A good mortgage adviser will track rates during that period and help you switch to a better deal if one becomes available. If rates fall, the important question is which deal the lender offers during that two-to-six-month window.
Some lenders are consistently competitive, while others appear near the top of the tables only occasionally. Unless rates are rising rapidly or there is sustained upward pressure, a consistently competitive lender may prove to be the lower-cost choice.
Customer service
Customer service is an important part of choosing a mortgage lender. Using a mortgage adviser means the lender’s processes may have less impact during the initial application, because the adviser handles much of the early interaction. Over the longer term, however, borrowers will probably deal with the lender more often than the broker. Customer service is therefore worth considering. Several factors play a part:
| Apps and systems | How easy is the app to use? What can you do through it, and what support is available? |
| Phone | How long is the wait? What can be done over the phone, and how quickly are issues resolved? |
| Branch | Does the lender have a local branch or access to a banking hub? What can be done there, and which services require another channel? |
| Broker or direct? | Which services are available only directly, or only through a broker? Lenders differ significantly in this area. |
| Approach | Is the lender customer-owned? How important are customers to its organisation? How willing is it to listen and support borrowers when circumstances change? |
Existing-customer offers and approach
Many lenders are building societies, which are customer-owned organisations. Five of the Big Six are not, and customer-owned lenders can still take different approaches. These differences can have a real impact on how much a property costs over the long term.
Affordability
Are you looking to move part-way through a fixed-rate deal? Do you want to borrow more to improve your home or pay off debts? Are you separating from a partner? If your circumstances change and you want to make changes to your mortgage, how will your existing lender treat you? Some are more generous to existing customers, some will listen to your circumstances, and some will follow their rules to the letter. Their approach can make a big difference to your options and costs if life changes unexpectedly.
Consent to let
If you move in with a partner or temporarily relocate, you may want to let out your property as an interim step. Many lenders will allow this during a fixed-rate deal, although some charge a fee or apply a higher interest rate. When that deal ends, what happens? Some lenders will let you arrange a new deal with them. Others require you to apply for a buy-to-let mortgage or pay their much higher standard variable rate.
Your next deal
When your initial two-, three- or five-year deal ends, it is time to arrange a new one. You can remortgage with a new lender or stay with your existing lender.
Price
From experience, often because of the effort involved and sometimes because circumstances have changed, many borrowers stay with their existing lender. The way the lender prices deals for existing customers therefore matters.
Does the lender offer better deals for new customers, the same deals for new and existing customers, or better deals for existing customers? There is a wide range of approaches.
Valuation
When you arrange a new deal, the rate offered will depend on your loan-to-value (LTV). The lender will estimate the current value of your home, but it may not account for significant improvements or positive changes in the local area. Some lenders make it easy to challenge the valuation, potentially allowing you to benefit from a lower interest rate. Others do not allow this unless you have built an extension.
Timing
Mortgage offers generally last for six months. If you want to secure the best deal available for your next mortgage, you may be able to apply six months before the new deal starts, then track and switch deals if rates fall before it begins.
If you stay with your current lender, only a few let you do this six months in advance. Most will not let you switch until you are three or four months from the end of your deal. This can leave a two-to-three-month period in which rising prices could affect your options.
If a new mortgage deal is cheaper than your current one, a small number of lenders will let you switch early.
Flexibility
All lenders offer a standard variable rate (SVR) mortgage, as well as two- and five-year fixed-rate deals, usually at a significant saving compared with their SVR. Some offer three-, seven- and ten-year deals too. If your future plans do not fit neatly within a fixed term, what other options does the lender provide? Some lenders offer a one-year fixed rate. Others offer tracker or discount deals at a rate significantly below their SVR and without an exit fee. These options can provide greater flexibility without the associated cost.
Some lenders are also starting to offer lifetime deals. These can provide security while allowing you to move home or make a significant overpayment without a penalty, depending on the terms. They may suit borrowers who want long-term certainty and flexibility, if the pricing is right for their circumstances.
Rewards
It is also worth considering what rewards lenders offer and who can benefit from them.
Some lenders are supporting the move towards lower energy use in the home. They may offer cashback, up to £2,000 at the time of writing, or lower interest rates when you make improvements that reduce your home’s energy use. Over a two- or five-year deal period, these benefits may outweigh relatively small differences in mortgage rates.
Other incentives can also add up. These include building societies that share profits with members, lenders that do not charge administration or CHAPS fees, and lenders that offer slightly lower fees when you hold multiple accounts with them. These rewards are rarely as significant as the factors above, but they may still suit your circumstances.
Final thoughts
Although mortgage deals are often considered over two-, three- or five-year periods, the mortgage itself is likely to last 25, 35 or even 40 years. The lender you choose at the start may remain your lender beyond the initial deal. Considering its overall approach, alongside advice from someone who understands how different lenders operate, can be time well spent.
WR Ethical offers a free consultation for anyone choosing a mortgage lender, reviewing an existing mortgage or preparing to remortgage. Book an appointment to discuss your circumstances and the options available.
Remember, your home may be repossessed if you do not keep up repayments on your mortgage.
