Will Fraser, National Sales Manager, Standard Life Bank,
Since the 1980s, when the Bank of England took its most severe measures to reign-in house price inflation, the industry has experienced a veritable remortgaging boom. Raised interest rates, which increased the cost of borrowing, and therefore of moving home, had a dramatic impact on the way consumers viewed their mortgages. Faced with a sudden dip in disposable income, borrowers who had previously been indifferent to their mortgage rates sat up and took notice of what they were paying for their borrowing. This increased the number of people opting to remortgage, driven by a desire to achieve the best deal or to raise funds for improvements on their existing home.
Since then, consumers have increasingly embraced the idea of remortgaging in their quest for best value. In 1999, the value of home purchases was approximately £81,600 million and remortgages £28,200 million – accounting for 25 per cent of the total market total lending in that year. By the end of 2005, the remortgage market accounted for 43 per cent of all lending; a clear indication that the sector is still very much alive and kicking.
This remortgaging phenomenon has grown as telephone banking and the internet have emerged. Fast and easy access to such a wealth of information means consumers are more aware than ever of the range of products available to them – and at what cost. The rise of product comparison websites with their best-buy tables has persuaded us to take advantage of headline-grabbing rates, however superficial they may be below the surface. Technological advancements promising to ‘fast-track’ remortgages have also helped to fan the remortgaging flames. Set to revolutionise the market, these are driven in part by increasing demands from borrowers and spurred on by the mortgage industry’s desire to speed-up and smooth out its application processes.
What goes up...
Many advisers have been able to cash in on the remortgage boom to date – but is it wise to simply expect this level of business will last? This is not to suggest that the market is on the brink of any kind of crash, but there are signs that it could be moving in a different and potentially less lucrative direction.
Consider the two-year switching model, based on the premise that 70 per cent of a broker’s book will switch every two years. If that broker’s only way to add value is to seek out cheapest product at the end of each two-year term, how long will this continue to impress today’s internet-adept consumer? Consumers have greater access to information and resources to carry out this research and switch their product themselves, so what added value will lie in this broker’s business? This is of particular concern for those looking to move out of the industry – how will they sell their business on?
The current economic climate could also serve to level out the remortgage market. With the outlook for interest rates set to remain relatively stable, the number of people deciding to remortgage to take advantage of a better deal may well decrease, while longer-term remortgage deals would obviously look more attractive.
Add to this the growing price tag of switching in recent years and we may well uncover a new generation of borrowers who demand a competitive rate for the life of the mortgage term on a ‘switch, save and stay’ basis. Given that it is becoming increasingly expensive for mortgage lenders to put fixed rate products together, making these deals less competitive, long-term products could offer these mortgage hunters best value.
Rewarding loyalty
Long-term products have the potential to be a win-win-win proposition. For borrowers, they provide the chance to escape the additional set-up and get-out costs involved with switching between shorter-term products. For advisers, less administration time spent flitting between lenders can free up time to spend focusing on new business (provided there is added value, as I shall come on to later). For lenders, retaining customers means less time spent on re-inventing ways to bring in new business and less money wasted trying to attract new customers who may move on after just a few years.
In order to achieve this ‘Holy Grail’, lenders need to offer both customers and advisers added value for going the distance. Since the adviser’s first responsibility clearly lies with their client and in securing them the best deal for their circumstances, if the borrower would benefit from switching their mortgage lender – then that must be their recommendation. So, for a lender to achieve their goal of customer retention, their first consideration must be their product proposition. Some lenders have introduced long-term rates that offer genuine rewards for loyalty over sustained periods. The Rate Reducer feature, for instance, on our Freestyle flexible mortgage provides an increasing discount over the first five years when mortgage debt is at its highest level.
For advisers, this kind of stepped product provides a unique insight into exactly when their client’s disposable income will increase, which encourages a long-term approach to financial planning and opens up cross-selling opportunities. A rate step that frees up £50 per month, for instance, might open up the chance to discuss pension planning or critical illness cover. But there should be other adviser incentives too for promoting long-term value. Lenders may need to rethink how they reward those that bring in new business – with a shift in emphasis from quantity to quality. The number of times a customer has remortgaged may become a factor when providers make their lending decisions.
The value of adding value
Mortgage hunters are becoming much more financially astute, and seek out products that not only suit their lifestyle, but entail the flexibility that they demand. One of the key means to achieve customer retention is to ensure mortgage holders are realising the full potential of their long-term products – unlocking the features on their mortgages that will add real value for them. This could be payment holidays, over or underpayment options or the opportunity to add the fees to the loan and compound up over the mortgage term. However, again advisers need to see the benefit of communicating with customers about these additional benefits – otherwise, what’s in it for them?
For advisers, long-term flexible products can offer a real value proposition for their clients. The combination of flexible features offers them the chance to not only plan their mortgage but employ it as a financial and lifestyle management tool. For instance, if an adviser can help save their client money by recommending they use their mortgage to finance what would otherwise be expensive borrowing, it provides the opportunity to advise on other products and services that the client wouldn’t otherwise be able to afford. Likewise offsetting could help to create additional capital that might be directed towards retirement planning.
Customer retention is the mortgage provider’s mantra, but will never be achieved as long as quantity remains more lucrative than quality. The onus lies with lenders to ensure their long-term rates offer genuine value – for consumers and advisers alike. By working in partnership, providers and advisers can realise the full potential of long-term products and enjoy the fruits of customer loyalty.
* Borrowing back overpayments, or taking payment holidays will increase your capital outstanding and interest payable.
