It was only a matter of time before prime lenders started to incentivise brokers not to remortgage their clients to other lenders. Only this week I have seen a mailer from the Woolwich to brokers in which it encourages them to recommend to clients on two-year fixes that they simply switch to an alternative Woolwich product, rather than opting for a mortgage with another lender. The Woolwich points out that if they do this no factfind is necessary, no KFI is required, no credit-searching is involved, no re-underwriting need to be done – and brokers will save loads of time.
All brokers need do is to look at the retention products available from the Woolwich on its website, identify the most suitable deal for their client and complete a simple ‘change mortgage’ form. Nothing could be simpler. What’s more, the Woolwich will pay a proc fee of 0.2 per cent of the mortgage balance, or 0.25 per cent on offset mortgages.
I’m sure the Woolwich isn’t the first lender to put a retention plan in place and it most certainly won’t be the last. Retention has been a major issue for lenders for some time now and it was almost inevitable that the big players would start looking for ways to hold on to their existing clients.
Key battleground
The problem, of course, is that two-year fixed rates on prime mortgages are a key battleground for new business and one in which margins are wafer-thin. Many products don’t actually break into profit until the end of the two-year fixed period and if borrowers then decide – or are encouraged by brokers – to switch their mortgage to another organisation, lenders end up making a loss.
It’s surprising this situation has prevailed for so long. The reason is that historic mortgage books mask what’s really going on with new business and, when it’s so hard to win market share, lenders are reluctant to close any doors to new business – even when they know it doesn’t really make much economic sense.
Client retention – or to be more accurate, a lack of it – is costing lenders millions of pounds a year and they are desperate to find a solution to the problem. The conundrum they face is that no one wants to be the first to buck the trend and start doing something different, but history tells us that when some of the larger lenders put their weight behind an initiative, there is a reasonable probability that the rest will follow suit. There has been a strong herd instinct in the mortgage market for many years.
Incentive to switch
As long as the margins between new business rates and SVRs remain as wide as they are, there is always going to be an incentive for borrowers to switch their mortgage as soon as they fall out of any special deal term. This has been made even easier as overhanging redemption penalties have fallen by the wayside. The only disincentives at the moment are the cost of remortgaging (but even then, many of these costs are either subsidised or removed altogether) and general consumer apathy. One key factor keeping lenders afloat is a pool of borrowers who are sitting on SVR mortgages who simply can’t be bothered to do anything about it.
The writing is on the wall, however. The industry cannot bury its head in the sand forever and the time has come when lenders need to do something about it. It seems inevitable that proc fees on prime deals will continue to be under pressure, simply because there is not enough margin for lenders to pay out more. It also seems inevitable that lenders will encourage this type of business to be submitted direct – it’s a lot easier and efficient for them to handle it that way.
Marginal worth
The harsh reality is that prime mortgage business is going to become of increasingly marginal worth to intermediaries. If you calculate the rate you get paid in terms of proc fee divided by the number of hours involved in arranging a prime deal, you would probably give yourself a serious shock. You may even be better off selling beefburgers at MacDonald’s.
It’s essential, therefore, to find ways to diversify your sources of income. An obvious starting point is to focus more on classes of mortgage business which do generate a worthwhile income: buy-to-let, self-cert, non-conforming, etc. For example, at the moment one of the fastest growing sectors of the market is the near-prime market; borrowers with a minor adverse credit record (typically less than £1,000 worth of unsatisfied CCJs) who are looking for a mortgage. This sector has been fuelled by growing levels of consumer debt, which now officially stands at £1.158 billion in the UK – more than the £1.127 billion of economic output generated by the UK in 2005.
Potential growth areas
We’re also receiving a lot of enquiries at Mortgage Next for further information about markets which brokers have never been involved with to date. Finance for overseas properties, commercial finance and equity release are top of the hit list at the moment. These are all sectors which enable brokers to add real value to the service they provide.
As obvious as this course of action seems, many brokers seem afflicted with the same problem as lenders – unwillingness to face up to the facts and do anything about it. In a recent broker survey undertaken by a mortgage magazine, when asked if they expected their business levels to rise in 2006, 69 per cent of brokers said yes. When asked the same question about income levels the answer was very similar with 68 per cent anticipating making more money.
Unfortunately, the CML is forecasting a fall in mortgage levels from £291 billion of gross advances in 2004 to £275 billion in 2006 and 2007. That’s mirrored by a fall in property transactions from 1.23 million in 2004 to 920,000 in 2006 and 2007. The harsh truth is that the market is contracting – and yet the majority of brokers expect to make more money. I’m afraid the figures simply don’t add up.
The only way to make more money in today’s flat mortgage market is to do something different. Those enterprising brokers who are willing to give new markets a go and change the way they do business are the ones who are most likely to prosper. If, on the other hand, you simply carry on doing what you have always done, you are in for a very disappointing year ahead.
