Aren't Mortgages Interesting?
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We have always found it very interesting how when you are buying a property there seems to be lots of information available but not necessarily the right information. It has always intrigued us how (in our eyes) when buying a property the most important information is that in relation to that property with regard to its condition and its value and, in our eyes, this information should be very important, if not the most important thing, yet somehow it seems to take a back seat in the property purchasing process.
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The property buying process
Whether you are buying a new home or a commercial property the process that most people take is via an estate agent, albeit that we believe the latest information that most people have upon the Internet as well, the property will be being marketed by an estate agent, who you will ultimately meet and be shown around the property. Their main aim is to sell the property for the seller, known often as the vendor.
Introduced to a mortgage adviser
Interestingly, in our experience, most estate agents will have their own mortgage adviser or introduce you to one. For many of you it will feel like it is more important for them to introduce the mortgage adviser (or should we say mortgage seller) than it is for them to sell the property, this is because mortgages are big business.
Independent surveyors are rarely, if ever, recommended by estate agents
In our experience, very rarely do the estate agents recommend a surveyor to carry out a building survey or structural survey, as it is often known, which we can understand as they are representing the vendor and therefore don't want any problems or issues to be put in the way of them selling the property and therefore earning their commission, because remember the estate agents don't earn any money until they have sold the property, when they earn their commission.
Solicitors do get recommended when buying property
However, solicitors do tend to get recommended, many of the big estate agents / mortgage lenders also own solicitors or conveyancers, as many are, either way solicitors will get recommended and as the estate agent is after a speedy sale he therefore wants a solicitor that deals with the matter in a timely professional manner. In turn, we find as surveyors that many of our recommendations come directly from solicitors and/or word of mouth recommendations.
An integrated team or a cartel?
You can see from reading the above that the estate agents are often related to the mortgage advisers and the mortgage companies, which in turn may also have an involvement with the solicitors or conveyancers that are carrying out the property purchase and also many surveyors are also owned by these companies, which tend ultimately to be mortgage or money companies. You could argue that this is an integrated team or a cartel, you could also argue that an independent surveyor is the only way to get an independent view when purchasing the property.
It really is the mortgage that is the main business that goes on when you're purchasing a property.
Like any big company, the mortgage companies manage their risk and minimise and limit it as much as possible. Whilst they are in the business of lending money they do this with as minimal risk as possible. They are also in a very unique situation because they have what is known as vertical integration. By this we mean that they are integrated into the market as a whole as many, if not most, own or have reciprocal agreements with estate agents and many, if not most, also own or have reciprocal agreements with surveying companies and likewise have agreements with insurance companies as well for building insurance and building contents insurance.
Is the property market, particularly the housing market, a good case for the Mergers and Monopolies Commission?
Interestingly, in other industries where vertical integration has existed the Mergers and Monopolies Commission has deemed this to be unfair competition. A good example of this is the brewing industry, which had vertical integration by brewing the beer and then selling it through the pubs, restaurants and hotels. This was broken up by the Mergers and Monopolies Commission limiting the number of pubs a brewer could have to what many brewers argued was an unsustainable lower level, which resulted in a massive change in the market.
Some national names that you will know
The vertical integration mortgage companies have, in our opinion, allowed them to manage the market very closely. We have heard it said that most estate agents are mortgage companies in disguise, in fact we saw this morning an estate agents that had underneath it financial property services, which probably sums up the order of their profit margin as well! Equally, many banks have also seen the opportunities within the mortgage market and have bought into building societies who traditionally lent on properties, for example Barclays Bank are the owners of Woolwich, which was once a building society, we are not sure if it still is classed as such, Lloyds Bank are now the owners of Cheltenham & Gloucester and HBOS plc own the Halifax, which at the time of writing is the largest lender of mortgages in the UK. They in turn own estate agents and Colleys, the surveyors.
How do mortgage companies manage their risk?
Again, this is our opinion. In a good market for the mortgage companies they will relax their criteria for lending money. A good example of this, that had massive impact, was in the early 1970's when building societies changed their criteria for lending and this freed up money, which in turn was meant to have been one of the reasons for the boom years of the early 1970's when houses went from the hundreds to the several thousands of pounds. This seems almost unbelievable with today's prices. Having said that, the market in the 1970's still wasn't opened up to everyone, just the better candidates, or should we say the less risky ones.
What sort of deal will I get?
This all depends as to what sort of prospect you are to them, whether you are a primary, secondary or tertiary prospect. There are also companies coming into the market who are keen to build up a portfolio of mortgages and therefore offer good discount for a while, which you should always look out for. We recently listened to a money programme on Radio 4 which described misplaced loyalties to staying with the same company as madness and that we should always be on the look out for the next good deal because there aren't that many bonuses available to being loyal any more.
Why does the deal I got five years ago differ from the deal I could have had last year, which in turn differs from the deal I could have had today?
This is because the property market is always moving and changing and as such the risks are always moving and changing. In the late 1980's/early 1990's it was said that the property market was reflected at floor level that a certain building society would lend at in a block of flats. For example, at one time they would lend up to the 8 th floor, then the 10 th floor, then the 12 th floor and then it went back down again. Therefore you are in a situation where you could have had a mortgage with this particular company at one time and you were living, for example, on the 12 th floor then when you came to re-mortgage they were no longer interested in mortgaging with you, as you fell outside their criteria. What was worse was that you fell outside most mortgage companies criteria. The new mortgage rate you could get was not very competitive. As an aside, I later heard that the number of floors that a building society would lend up to was related to the fire risk rather than the mortgage risk, but nevertheless an interesting concept.
Another way the mortgage market selects the risk it is prepared to take is by the information they require. For example, many mortgage companies will do self-certifying mortgages in good markets. These are mortgages which you confirm what your salary is rather than them having to prove it, whereas when the market isn't so good they will require accounts or other means of proof and equally with the other breath they will see they can see what you are earning as the money is passing through their accounts.
The percentage of property value the mortgage companies will lend at
We think a very clear example of this is what percentage of a property that the mortgage company will lend you, for example, when times are good and the mortgage companies consider the risk to be low, they have been known to offer 100% to 125% of the value of the property. The 125% does need some thinking about as what they will actually lend you is more than the value of the property, but they will do this based on the fact that the property is going up in value and possibly that you are in a profession that they believe will have an increased salary to carry on paying the mortgage. By no means will they let anyone take this type of mortgage, but the very fact that it is available means it is a good market.
In a less favourable property market what is known as the loan to value ratio, or LTV, will be reduced considerably, possibly down to 75%, meaning that anyone wishing to buy a property would have to put in a 25% deposit.
You may like to find out more about Mortgage Valuations:
We hope the above helps you understand how the mortgage companies manage their risk and how it affects you. If you would like any further help and advice about a structural survey or a building survey on the property or any disputes that you may have with the builders, party wall issues, boundary disputes, etc, then please call us on 0800 298 5424 and a surveyor will call you back for a chat.
We hope you found the article of use and if you have any experiences that you feel should be added to this article that would benefit others, or you feel that some of the information that we have put is wrong then please do not hesitate to contact us (we are only human).
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