You are someone who hates wasting money, right? You’re the kind of person who cannot stand being in debt. You are working as hard as you can to make wise use of your money so that you control it rather than it controlling you. So why are you even thinking about going to your bank to get a mortgage? That person on the other side of town who calls himself a local mortgage loan broker can do a lot for you that your bank loan officer cannot.
A good way to conceptualise how much better mortgage brokers are than banks is to frame the discussion around a single word: savings. And by the way, not just minimal savings on costs and fees. Think decades of savings that add up over the lifetime of your mortgage with every monthly payment you remit.
Save Some Serious Cash
If you doubt how serious your savings can be, ask yourself how long you intend to carry a mortgage. Maybe you are looking at 15, 25, or even 30 years. Every mortgage payment you make will include interest. The longer you carry that mortgage, the more interest you will pay.
Let’s say you get a £240,000 mortgage at 5% for 30 years. By the time you make your final payment you will have paid more than £140,000 in interest. Yes, you read that correctly. You would have paid an amount more than half the original mortgage in interest alone.
Now that we have your attention, let us talk about how you can save for decades by using a mortgage broker. The key to understand here is that an independent mortgage broker is not limited to one or two products offered by a single lender.
How Mortgage Brokers Save Money
Since an independent mortgage broker doesn’t represent just a single institution, he or she has access to virtually every mortgage product on the market. What’s more, mortgage brokers have access to deals offered exclusively through brokers. These are deals you will not get through your bank.
Why does this matter? Check out the following:
1. Mortgage Interest
Mortgage interest is the biggest single expense over and above the principal. That’s why annual percentage rates (APRs) are so critical when searching for the right mortgage. The higher the rate, the more interest you pay. Yet that’s not even the half of it.
Interest is calculated annually. For the sake of easy maths, let’s assume you obtain a mortgage at 12%. For the first year you will pay 12% on the total amount you owed at the start of the year. That amounts to 1% per month. At the end of the year, your interest will be recalculated based on your outstanding balance at the beginning of the second year. So you are not paying 12% in total, you are paying 12% annually.
A mortgage broker has access to a lot more products and, as such, a larger choice of interest rates. If there is anyone capable of finding you the lowest possible rate, it is a mortgage broker.
2. Lower Arrangement Fees
Next, the mortgage broker’s access to more products also means being able to find loans with lower arrangement fees. What is an arrangement fee? It is a fee charged by a lender to cover processing the loan application. Arrangement fees are generally calculated as a percentage of the total loan.
If you can get a loan with a lower interest rate and lower monthly payments, you might also be able to make a higher down payment. A higher down payment means a lower loan amount and a cheaper arrangement fee.
3. Making Early Payments
The final point here is the most important of all. A mortgage broker capable of finding you the lowest possible interest rate will be helping you obtain a loan with lower monthly payments. The lower your monthly payments, the greater the chances of you being able to make extra payments every now and again. How does this help?
Making extra payment means applying more money to the amount you owe. As your principal drops, so does the amount of interest you pay. Paying your mortage early reduces interest even more.
That same 30-year mortgage we talked about earlier would be a lot less costly if you paid it off in 10 years instead. Remember that interest is calculated annually rather than over the life of the mortgage, so paying down the principal reduces your interest and saves you money.
In short, you can save for decades when you choose a mortgage broker over a bank. A mortgage broker has the incentive to find the best possible deal out there. Your bank has no such incentive. If you want to save, use a mortgage broker. If you don’t care, your bank has mortgages too.