People who have been bankrupt, repossessed, have had mortgage or rent arrears or other financial difficulties are usually vulnerable and open to exploitation if they meet up with the wrong kind of mortgage intermediary, although it must be stressed that there are plenty of the right sort out there if you can find them.
I have come across instances where borrowers have been introduced to one of the sub prime lenders and have been charged an enormous fee for the privilege by the broker. Fees I have heard about range from £1,500. This is in addition to being charged the usual inflated interest rate (which will depend on the level of adverse credit information and which is not influenced by a broker - except as mentioned later).
The influence that can be down to the broker will occur where he knows of a scheme with a lower interest rate and better all round conditions, but because the commission or Procuration Fee is lower, he will not inform the customer about that scheme or that lender.
However, the main bone of contention is the broker fee.
Brokers - or Introducers as they are known - are usually paid handsomely by the lender, with the minimum being usually several hundred pounds per case or around 1% of the loan, and Right To Buy mortgages being a little less.
Some might say that 1% of the loan amount is too high - but you have to realise that brokers are paid by lenders, not only for the cases that succeed, but for the dozens of cases that they work on which do not proceed, for the costs of advertising and all of the usual expenses of running any business.
If brokers were not properly remunerated they would cease to exist and the public would be left with no-one to turn to for advice.
Borrowers in this predicament should be aware that there are Packagers on the one hand - who package mortgage by sending for references, valuations and so on in order to prepare the case for the lender - and Brokers on the other hand who decide which packager to use for each case. There are a few lenders in this field who allow the broker to be both packager and broker.
Most Packagers (with a few exceptions) only package for a few of the sub prime lender's - so a broker has to be aware of which packagers are connected with which lender.
The broker should also be aware of the administration fee's charged by individual packagers. These will usually consist of an amount to pay for the actual valuation plus an administration fee, and as an example I know that for the same case, one packager charges an all inclusive fee and another firm charges four times as much for the same thing from the same lender.
Some lender's are currently offering modest discounts on the interest rate - but if you choose the wrong packager, you don't get the discount.
Some brokers will not only not charge customers any fee for themselves, but might even provide a modest Cashback from their payment from the lender in order to encourage a customer to stay with them (my own firm does this in most cases, with a minimum cashback of a few hundred pounds. It depends on the fee earned and the work carried out).
The guideline for borrowers is to ensure that they do not use a broker for a First Mortgage who charges them a fee (*except for below). Insist on a printed illustration of the mortgage containing full information about charges and Early Redemption Charges - ask for similar illustrations for the schemes which are not being recommended because all brokers should have access to all schemes, including those where packagers are not involved, or at least ask why other schemes have not been mentioned and get the reasons in writing.
(*A fee might be reasonably charged where the lender does not remunerate the broker at all).
Using a broker should mean wider choice. He will know all of the schemes and will know which packagers deal with which schemes - he will know the up front admin/valuation charges for individual packagers as well as which packagers are the most efficient.
Borrowers should enquire about the Fresh Start schemes from Paragon Mortgages where loans to 80% can be made at a modest premium of 1% to the Standard Variable Rate, reducing to the SVR after 3 years of satisfactory payments - or HMC (Household Mortgage Corporation)who will lend up to 95% at very reasonable rates - but not to former bankrupts (the loan will be lower)or people who have been repossessed and who do not qualify for the scheme at all. Both firms take a long time to make an offer and are quite particular, so they may not always be suitable.
The above remarks are intended to be helpful. Intending borrowers should not assume that every broker is out to exploit them, but you should realise that your business is being sought after and you should be choosy who gets it.
The sub prime mortgage scene is complex and each case is unique, so choose wisely - but do use a broker.