The Great Mortgage Rip Off: How Estate Agents Cash In

Joe Public's largest ever financial commitment is often buying their home. As you'd expect, handling that transaction assumes a great deal of responsibility.

But the fact is, estate agents are ripping homebuyers off when it comes to the mortgages they offer.

The government is planning to put a stop to these practices. Until that's resolved, current practices are bad enough for unsuspecting homebuyers.

But it can get worse when estate agents force their own mortgage lenders upon specialist borrowers.

In the worst case scenarios, estate agents nominating an unqualified, non-specialist lender can spell disaster for contractors. Today's post outlines how you can—and should—avoid mortgage lenders who just don't grasp how you work.

Specialist borrowers need specialist help to buy a home

Freelancers and contractors handle their income differently. Underwriters at contractor-friendly mortgage lenders understand that. But you can bet that lenders tied in with estate agents aren't vetted for their scope.

All estate agents see is the ka-ching of commission, regardless of lender flexibility. So referring an independent professional to a lender can be way beyond their remit.

By referring contractors to a generic lender, agents aren't doing themselves any favours. No mortgage, no commission. But they could also wreck a self-employed applicant's credit file in the process.

Whistleblower reveals a decade of decaying practices

A worker of ten years in an estate chain in South London has provided shocking industry insights. They've blown the whistle on the unfair practices estate agents are trying to pass off as a service.

Agents are no longer content with the commission of selling a home. They're also cashing in by referring buyers to a mortgage broker with whom they're in cahoots.

The opportunity estate agents have seized lies in their clients knowing no better. But buying a home is not like doing the weekly shop or ordering pizza. It involves so much more.

Most people only ever buy a home a handful of times in their life. It's their ignorance of that process which estate agents are exploiting!

Greasing the palms of naive homebuyers

Borrowers know too little about home-buying to realise that an estate agent is conning them. Agents are exploiting this naivety to pocket extra commission for themselves. They're even offering incentives to homebuyers to use their mortgage lender partner.

A cash gift of a grand can seem like a windfall when you're buying a home, especially if it's your first. And that's how estate agents are pulling off this trick.

They offer the homebuyer a cash sum as an incentive to use their mortgage provider. A gift! But not as much as the agents themselves receive! They are, in fact, earning a much bigger commission and pocketing the difference.

But it doesn't end there.

Vendors vetoed from selling to buyers with their own mortgage in place

It's got to the point where estate agents are holding out for the opportunity to sell a mortgage as well as a home. They are proactive in putting off buyers who come with their own mortgage in tow.

If the buyer has an independent mortgage, that cuts the estate agent out of the commission loop. In such cases, agents are deterring vendors who could otherwise sell their home.

They're accomplishing this by representing bids for homes with bias and clever wording. They're encouraging the seller to go for the buyer who's doing everything “in house”.

Guaranteed commission: a natty, but nasty tactic

Agents are even offering vendors options of only dealing with “financially verified” buyers. All that means is the buyer is doing everything “in house”.

Vendors who take up this option guarantee the agent a commission on the mortgage. Yet taking this option risks getting offers from a limited pool of buyers.

Even in-house, estate agents can offer no such guarantees of a sale completing. Those chances lessen for non-standard borrowers, because the agent has only limited mortgage visibility.

So when it comes to short-term contractors, they're providing an even greater disservice. If the agent's mortgage provider isn't geared up for specialist lending, it's game over.

Data Protection is non-existent

The Data Protection side of Estate Agents' dealings is woeful, too. Agents conduct interviews in booths, rather than in a closed office. The discussions are within earshot of anyone in range.

But it gets worse. Agents are also slipshod with sensitive paperwork. They leave paper trails everywhere, which anyone can find and read.

This gives the agents access to private information. They know when a buyer can comfortably afford the mortgage they're going for. They use this to go back to the vendor, hinting that the buyer could afford more if pushed.

The higher the house sale, the greater the agent commission. Plus, they'll get more from the mortgage lender for getting the buyer to borrow more. And, yes, the vendor will get more for their home.

But the poor buyer gets hit with a double whammy. First, they have to borrow more to pay for their home. Then there's the insult and danger in having personal data breached by slipshod staff.

Big business fuels old conceptions

To understand just how big business this is, the whistleblower used an example. Her firm made £4.3bn in property sales in 2014, but £100M more, £4.4bn, in mortgage commission.

The joke is that estate agents no longer sell houses, they're glorified brokers. I see no one outside the industry laughing.

For decades, the industry has cast a poor image. Sleazy, duplicitous agents coaxing as much money out of buyers. The industry coming up with phrases like “compact and bijoux” for tiny spaces. Fast cars, sharp suits and a range of selling techniques that go beyond acceptable.

It looks like their reputation is well deserved. But there are plans afoot to stop the rot.

The Government to the rescue, hurrah! (Yes, really!)

On the 22nd October 2017, government launched a consultation into UK homebuying. They wanted to know "how to improve the process of buying and selling property".

Its purpose: “to make the process of home buying and selling cheaper, faster and less stressful.”

Fine incentives indeed. But it did a little more than that.

One of the outcomes of the consultancy is a new professional estate agent market. New regulations will “[drive] up standards and [bring] an end to ‘rogue managing agents’.”

The new guidelines will also help buyers become more informed. The outcome of the consultancy is a 53 page document. But here is an overview of the key measures that will assure buyers that they can buy with confidence:

Estate agents will need to:

• hold a professional qualification;
• be clear about reservation fees to help prevent gazumping;
• be clear about referral fees they're receiving, and may even see them banned from practice.

Local authorities will have:

• a strengthened National Trading Standards Estate Agency Team to enforce new regulations;
• the power to ban agents who flout the new regulations;
• to provide buyers requisite search information within ten days.

Buyers will be more informed about the process of buying a home. To accomplish this, the government is developing “How to Buy” and “How to Sell” guides. Their aim is to help buyers and sellers be “better informed of the process and know what questions they should be asking.”

Help to choose the right broker for your mortgage application

The guides will also provide metrics for the type of conveyancer they should be using. These will include transparency, industry-wide targets and quality standards.

Thus enlightened, buyers can make more informed decisions about relevant brokers. They should also go a long way to help stop “rogue agents” ringfencing the buying process.

The guides will also recommend that all non-cash buyers get a Decision in Principle. This makes sense, but we must also state that a Decision in Principle is not a mortgage offer.

For freelancers and contractors, this is always the sticking point. A non-specialist broker will look at their day rate and start rubbing their hands.

But they don't realise that contractors use limited company payment structures. As such, contractors only draw a small percentage of their income as salary.

When their application gets to head office, underwriters only see that small figure. It will not reflect a contractor's true mortgage affordability. This will then often lead to rejection with a non-specialist conveyancer.

So, yes. That the government is stepping in to stop estate agents' dirty dealings is great. They are welcome and long overdue. But specialist borrowers will still need help to get a competitive mortgage.