There has been a lot in the media recently about fees-free remortgage products. What should I be aware of and what should I be telling my clients?
Eddie answers: Free legals – or ‘fees-free’ products – have been commonplace in the remortgage industry for some time. Fundamentally, the ‘fees-free’ facility is where the lender offers the services of their solicitors to remortgage clients, free of charge. This is possible because remortgages are essentially a financial transaction with only one party involved, unlike a traditional mortgage which is much more complex and where each party – vendor, client and lender – should have legal representation.
The benefits of the fees-free arrangement are that the client saves money on legal costs and the transaction should progress quickly and easily as there is only one legal party involved. However, in normal, standard remortgages this is not a problem as the lender and the borrower want the same thing: speed. But if there are any problems, the borrower has no legal representation, meaning that no one is looking after their interests; which can have serious repercussions for them and their broker.
Rapid growth
Fuelled by the rising property market of the last few years, the UK has seen rapid growth in the number of remortgages as consumers look to unlock the burgeoning equity in their homes. The higher volume of transactions has led to a greater number of complaints, bringing the issue of legal accountability in remortgages to the fore.
Industry action
Recent coverage in the mortgage press has highlighted concerns with free legals propositions over customer service, length of time transactions take, payment of arrangement fees and other issues such as payment protection. The growing unrest among clients and volume of complaints has led the Legal Complaints Service (LCS) to act on the situation. In a recent announcement, the LCS stated that it had closed a loophole that prevented clients complaining about the solicitor’s handling of their remortgage. Previously, consumers were unable to complain about poor service, or lengthy transactions, as solicitors were only accountable to the lenders. However, under the agreement with the Financial Ombudsman Service (FOS), the LCS will now redirect these complaints to the FOS, who will able to act, regardless of these accountability issues.
This should assuage some fears about the lack of accountability in remortgages but there remains much ignorance among clients and brokers as to the exact nature of free legal propositions. Despite the prevalence of free legals within the remortgage industry, brokers and clients are still showing a marked lack of understanding of the finer details and how they might affect them. As the solicitor only has the interest of the lender in mind, not only can payment of funds be delayed to the client without punishment, but also arrangement fees to the broker can end up being paid late, if at all.
As for clients, any delay to releasing funds is usually costly. If money generated from the remortgage was planned to settle debts, payments may be late and clients could risk the wrath of creditors. If the remortgage is being conducted to purchase another property, tardy customer service and long-winded transactions could result in properties being missed and financial opportunities lost. Clients may see the financial benefits of fees-free, but when problems occur, this quickly becomes a false economy.
Under scrutiny
Following the intervention of the LCS, few lenders can surely afford to be answering questions from the FOS about their actions. Add to this the growing uncertainty in the financial markets caused by the US non-conforming situation, which has dented confidence in the UK, and lenders could soon be reviewing product portfolios, with the role of free legals coming under scrutiny. In a hostile climate, only the strongest players will survive in the UK non-conforming market. Those that do remain, however, will have less competition and will be in a position to be much more choosy about who they offer their mortgages to. As a result, they will be able to charge a higher rate, will enjoy healthier profit margins and will, therefore, not have to rely quite so heavily on add-ons to make themselves stand out from the crowd.
When it comes to ‘fees free legals’, Goldsmith Williams has always preferred what we call the ‘lender plus’ model, where we will act for the lender, but also look after the borrower and the broker. This model ensures that everybody’s interests are catered for, is rarely problematic and strengthens the industry’s reputation.
Armed with the new powers of redress, clients can now hold solicitors and lenders to account. In an already uncertain climate, lenders should ask themselves what the true cost of free legals could be.
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