Incentivised deals
The amount of choice now available to consumers is staggering. The relationship between mortgage product provider and consumer has changed enormously in recent years and now goods, services and the various forms of media can be bought, sold and consumed in so many different ways. Take the television and music industries, for example. Where we used to have four channels and a Walkman, we can now access tailor-made television and music anytime, anywhere.
The mortgage market has also grown exponentially over the last decade – in terms of sheer volume, new sectors and the way in which products are marketed and sold. Borrowers in need of a mortgage are now faced with a choice of thousands of individual deals, which are available via many different channels.
In addition to the usual choice between fixed, variable and capped deals rates and short, medium or long-term deals, there are now so many different combinations of rates, fees and other features.
There is no doubting the financial benefits of obtaining a good mortgage deal or switching to a new one when an existing arrangement is no longer suitable or competitive. However, many people simply don’t know how to go about getting one. For others, the process just appears to be too complicated and/or costly. Fortunately, the mortgage industry has developed to offer products and services that cater to every sort of borrower.
A trading game
The interest rate is of course the most obvious part of a mortgage deal, but a lot of the developments and changes have focused on other elements of the product and of the overall mortgage process. While the interest rate determines the ongoing cost of a mortgage, factors such as the arrangement fee, the valuation and the required legal work determine the scale of the upfront costs for borrowers. It is these elements that lenders have focused on when offering incentives to borrowers.
In most cases, the offering of incentives boils down to a simple trade-off between ongoing rate and upfront cost. The deals with the lowest rates will almost always require the borrower to pay all the upfront costs. Conversely, the more incentives on offer, the higher the rate.
Remortgaging
The growth of remortgaging has helped fuel the popularity of such incentives as mortgage providers seek to attract business. First of all they act as powerful marketing tools that can jazz up a fairly dull product. They also help to reduce the time and cost involved in switching from one lender to another, making the process more attractive for borrowers. Equally, the growing number of these incentivised deals has in turn helped to make remortgaging more popular.
Remortgaging lends itself to the offering of incentives due to the relative simple processes involved. As there is no property changing hands, both the valuation and legal work required are fairly basic compared to a purchase. This means that lenders can assess the rough cost of these and price deals accordingly.
As far as the valuation is concerned, all the lender requires for a remortgage is a valuation for mortgage purposes, which simply confirms that the property is sufficient security for the loan. Recently, more and more of these valuations are being done without the need for a visit to the property. So-called ‘desktop valuations’ are possible thanks to improvements in technology and the availability of Land Registry data via the internet. There are also similar developments in the conveyancing process, thanks again to better technology as well as the use of title insurance.
Overall these improvements help reduce costs and cut processing times for lenders. This should in turn lead to improvements for borrowers as lenders can offer these incentives in return for a smaller rate premium.
Incentives are less prevalent in the purchase market, but they can still prove popular, particularly with first-time buyers keen to keep upfront costs to a minimum. The legal work required is far more complex and costly compared to a remortgage, so a cashback option is often available. Many deals offer free basic valuations, but buyers still have to pay for their own survey if needed.
Assessing the deals
For the intermediary, assessing these incentivised deals and comparing them is usually a question of doing some sums – looking at the monthly cost versus the savings available thanks to the incentives.
For example, is the free valuation worth it for an extra 0.2 per cent on the rate? Will it be cheaper going for the no-arrangement fee option? These sums and these considerations are all client specific and there is no one simple answer, but the general rule is that they benefit smaller loans more than larger ones. The calculations are usually relatively straightforward, but the job can get harder when the deals get a bit complicated.
The ultimate example of an incentivised deal was the ‘Brum Brum’ mortgage launched in 2004 by the West Bromwich Building Society. On completion of the mortgage, the borrower was presented with a brand new Rover 25 car. Unsurprisingly, the interest rate was not a competitive one (5.99 per cent variable) and it carried hefty early repayment charges (ERCs) for the first five years. At the time, the best variable rates were around 4 per cent, so for someone with a £100,000 interest only mortgage, the difference in cost over five years would be substantial. However, with a deal like this, it is not just a simple question of cost. Even if the deal worked out mathematically, it was really only for those people who actually wanted a new Rover 25.
In January last year, Scarborough launched its ‘Plasma’ mortgage, which, like the ‘Brum Brum’ deal, also received a lot of press coverage. As part of the deal, borrowers received a ‘free’ 42-inch plasma TV from Sony worth around £3,300. There was a fixed and a variable rate option, with the fixed rate at 5.49 per cent for five years – as to be expected, both were quite a way off the best-buys.
In general, this deal worked out quite well for borrowers with smaller than average loans as they would be getting the television for less than the retail price, but again, it was a question of whether or not they actually needed one.
While standard incentives such as free valuations and free legal work are part and parcel of many mortgage rates, deals such as the ‘Brum Brum’ and ‘Plasma’ mortgages are sold (or at least promoted) almost entirely on the back of the incentives on offer. Whenever these two were mentioned in the press, the details of the mortgage rate appeared long after the car or TV were mentioned. The danger with promoting mortgages in this way is that borrowers may buy the incentive first and the mortgage second, which means that they may end up with an unsuitable deal.
For example, taking a five-year deal to get hold of the plasma television might not be the best move for someone who does not want to be tied in for longer than two or three years. If the borrower has to incur ERCs later down the line, any benefit will be lost.
Buy to let
The growth of incentivised deals has extended into the specialist mortgage markets in recent years. The buy-to-let sector, for example, is now full of deals that offer free or refunded valuations and/or a free legal service or cashback. As with the residential market, the growth of these incentives has run in tandem with the growth of remortgaging and steady growth of the sector as a whole. There are now more landlords than ever and more and more people aware of the benefits of refinancing their investment properties.
Other incentives
As the mortgage industry develops and continues to innovate, more and more incentives are being offered to borrowers as part of a mortgage deal. We are now seeing more intangible benefits being offered that lenders are using to gain competitive advantage and attract new customers.
These tend to be more service or criteria-related and while they may not offer an obvious cost benefit to borrowers, they could be enough to convince broker and client that one particular deal is better than another. Features such as fast-track processing can be attractive to intermediaries and their clients, particularly when a quick turn-around is required. The inevitable arrival of instant offers will also create another powerful incentive in certain cases.
Summary
Whatever the incentive, lenders will continue to use them as marketing tools to promote their products, differentiate themselves for competitors and attract business. Those who use them wisely and price their deals well will continue to benefit. For brokers, incentivised deals form part of an enormous range of products and mean that they should be able to find a suitable deal to meet any client’s requirements. Working out what deals are worth going for will always involve a bit of work and number-crunching, but doing so will mean customers get sound advice and are treated fairly. And by using a good broker, borrowers are less likely to be sold on an incentive or a freebie that come with an unsuitable mortgage.
