With the recent furore in the media over ‘rate tarts’ and the alleged high level of ‘churning’ committed by brokers, it seems strange to find a substantial number of lenders are still expecting most of their current borrowers to leave them within a few years.
While high street lenders have been crying foul over the practice of some brokers; who they believe are moving borrowers unnecessarily in order to collect more in fees as much to benefit their clients, the majority of lenders in the sub-prime sector do not expect to retain their borrowers at the end of the mortgage term.
This is not surprising, as levels of remortgaging have been running at a high level for most of the year. According to the Council of Mortgage Lenders (CML), levels of remortgaging were running at £7.6bn in September (the highest figure of the year, at 39% of total lending). But in general, there is still plenty of scope for mortgage brokers who choose to operate in the non-conforming sphere, as the demand for mortgages by those who do not fit the traditional lending criteria for borrowing is still growing rapidly.
A survey carried out by data analyst Mintel earlier this year found approximately one in 10 mortgage applicants are now thought to be sub prime, and that 20% of current mortgages may now be sub prime.
However, Mintel also found many brokers still shy away from this market, regarding it as too much work compared to the financial return.
The report noted: ‘They [brokers] have also been concerned about the high interest rates charged in the past and the negative impact this could have on their reputation.’
But with an increasingly established market that includes a number of high street brands, and interest rates in this sector now so low, there is little reason not to become more involved.
In many cases returning to a sub-prime client could prove more rewarding than a standard client, because while there are usually good reasons why borrowers fall into the sub-prime sector when they apply for a mortgage, it does not mean their situation can never change.
In a few years, a broker going back to the client should be able to find them a more competitive mortgage. If a broker can find a borrower a cheaper deal they will benefit from another procuration fee, but also from enhanced customer loyalty, as they have been able to save them money.
Once a sub-prime mortgage has been arranged, brokers should ‘diarise’ the end date as they would a standard mortgage, and return to the borrower several months prior to this to see if they would now be eligible for a deal at a lower rate.
Richard Hurst, communications manager at Future Mortgages, says: ‘If a borrower is using a broker, then just before the end of the deal the broker should be calling to propose they move to a prime rate. There is a duty of care from the broker to ensure their client has the best deal.’
Guy Batchelor, sales and marketing director at Platform Home Loans, agrees: ‘Brokers should be diarising it when they set up the deal in the first place. It is churn of sorts, but it is in the borrower’s interest if they could be on a lower, high street rate.’
At the moment, brokers face little competition for remortgage business as the communications programmes in place by high street lenders to remind borrowers of the option of a better rate may not be well established in the sub-prime market ‘ indeed it is not in their interests to see clients moving away to different deals.
Having said this, most lenders accept that borrowers should move away when they are able to get a standard loan, as Batchelor says: ‘We are not a lender for life: we are looking to repair damaged credit.’
Hurst agrees: ‘There are still many sub-prime lenders who are not trying to be all things to all men. The borrowers we take on have had problems in the past and the mortgages they can get are all priced for risk. Do we expect borrowers to stay in this sector for a 25-year term? No. They generally only stay for three to four years before they move on, unless they get into further difficulties. They should only stay in the sub-prime arena long enough to get onto another deal, although with sub-prime rates now lower than they have ever been, they may stay longer.’
However, exactly when a borrower will be able to remortgage depends on how bad the borrower’s credit history was prior to the initial sub-prime deal and how they have managed their arrears since.
Hurst says, as a general rule of thumb that: ‘When a county court judgement is ruled to have been cancelled out varies between lenders, according to their lending criteria. However, two to three years is usual if they have been paying their mortgage consistently during this time.’
Sub-prime remortgaging may not continue to favour the broker for too much longer, as lenders are becoming aware of the need to keep borrowers. Fewer lenders are now operating in isolation than previously. Many high street lenders have a presence in the sub-prime market either through their own brand, or through the acquisition of an existing lender.
But while most have opted to keep the groups separate, it will not be too long before they develop links that will try to keep the mortgage within the group for the life of the mortgage.
Platform Home Loans is a sub-prime subsidiary of Britannia Building Society, but Batchelor admits: ‘There is no link up with Britannia at the moment, although it is something we are looking at. Customer retention is important to us, as it is to all lenders.’
Colin Dale, head of lending at Skipton Building Society, agrees: ‘We are new to the sub-prime market and have not had many people coming off deals yet, but we would, of course, look to offer another deal. If they stay within the group they are treated as a new customer, they have served their ‘sentence’ and there would be no further penalties.’
Hurst says this is true of much of the market, but he too warns that brokers should not remain complacent: ‘At the moment, many lenders are just not sophisticated enough to deal with borrowers moving on at the end of the deal, and it is not just the sub-prime lenders. Many high street lenders seem to spend more on attracting new business, rather than keeping what they have already got, but it cannot go on forever.’
There is a popular statistic which claims it is four times cheaper to retain customers than to acquire new ones, and lenders do not have bottomless funds.
Another factor for concern is the number of ‘one-stop-shop’ lenders that have products designed to rehabilitate sub-prime borrowers with the intention of remortgaging them onto a better deal. But they are still in the minority. Birmingham Midshires, part of the HBOS group, does have one of these products.
Paul Fincham, spokesman for Halifax, says: ‘From a Birmingham Midshires perspective, it does have a rehabilitation product that reduces the amount paid over the base rate over three or four years.’
Nevertheless, a separate survey conducted by Mintel found there is still a way to go for brokers looking to remortgage clients at the end of the initial term.
The survey found 37% of borrowers in the prime market would visit their present mortgage provider at the end of the term, compared with 25% who would go to a broker. And in the sub-prime market 31% would visit another lender off their own volition whereas only 23% would choose to go to a broker. This would suggest brokers still have some ground to make up in this market.
The effect of regulation
But with brokers regulated consumers should be given more confidence to approach them when they want to remortgage, and brokers should be less concerned about operating in the sub-prime market.
Rod Murdison, partner with adviser firm Murdison and Browning, says: ‘It is different to other areas because at the end of the day, even if they have been paying too much, they still own the asset. We need regulation in the sub-prime sector because then it will be clear that brokers are not keeping their clients on an adverse mortgage because it pays them better.’
However, when this happens it may be too late to switch over into this sector as competition will be there. Brokers planning for the long term need to be building up their experience in the sub-prime market long before Mortgage Day.
Ben Marquand is deputy editor
It is thought that up to 20% of current mortgages could now be classed as sub prime.
Brokers should diarise the mortgage’s end date to see if their client is eligible to change to a lower rate.
Regulation could help spur borrowers out of their inertia and brokers need to be ready.