It is widely accepted that the borrower today is far more demanding and more clued up than in the past. When considering their finances people expect to shop around, whether it is for car insurance, the best holiday deal or to save money on their mortgage.
Media coverage on remortgages over the last few years has boosted the market, educating borrowers that there are better deals to be had. Indeed, 49% of mortgage advances made in the second quarter of this year were to people remortgaging, according to the Council of Mortgage Lenders (CML). And lenders themselves have stoked the remortgage fire further by offering hot deals to those who are prepared to switch lender.
However, lenders now realise that the borrower they win over from another lender today, will be testing the water for a better deal elsewhere tomorrow. Loyalty, or more probably inertia, is a thing of the past. People are far more likely to have had a number of mortgage lenders by the time they reach 40 rather than just one as would have been the case years ago.
From a lender’s business point of view this is not an attractive prospect as it is the long-term borrower that a lender needs in order to make a profit. Attracting new borrowers does not come cheaply, and offering certain rates to new business customers and not to their existing clients has only inflamed the problem. This is why we are starting to see lenders putting plans in place to combat repeat remortgaging and to concentrate on retaining their customers.
So what might a lender’s retention programme include? The best approach often comes down to common sense and good customer management. Contacting the customer well in advance of their fixed, capped or discounted rate ending with an appropriate offer will hopefully mean that they do not feel the need to look elsewhere.
More lenders are now also using product design to retain customers. Flexible and current account mortgages or ‘lifestyle’ mortgages as they are often described, are probably one of the strongest retention products on the market ‘ why would you move your mortgage if you can see how much interest you have saved and how your mortgage term has dramatically decreased through making overpayments? And with current account mortgages the borrower would need to change their bank and credit card as well as their mortgage if they decided to move lenders ‘ a good reason to stay put.
Getting service right is also important for lenders. Everyone knows that good service is a core need ‘ excellent service leads to loyalty. If the customer relationship is managed openly and fairly, why would customers want the trouble of remortgaging to the unknown?
But lenders need to look further than the borrower. Brokers are also incentivised to encourage their clients to move to another lender by procuration fees. Approaching their clients with a way of saving money, through the remortgage, also provides the broker with the ideal opportunity to review their clients’ needs and potentially sell other products, such as critical illness cover, leading to increased income for the broker.
There has been much talk lately of the need for lenders to work more closely with brokers and to offer more innovative earnings structures. For example, retention bonuses for borrowers staying with the lender for a certain amount of time or regular commission rather than one-off fees to help encourage the broker not to move the customer elsewhere. However, the market has not been keen to take this up.
Lenders probably realise that the procuration fees they pay are bread and butter to the broker ‘ why would the broker want this to change? And with competition being so fierce the lender needs to keep the mortgage broker happy.
Halifax however has started to address this by paying additional commission to the mortgage broker for further advance business, therefore encouraging the broker to keep the business with them and not to look at the rest of the market when further borrowing is required. This could perhaps be the start of a trend.
So, what about the lender involving brokers in their customer relationship programme ‘ giving the broker a reason to approach the customer with a good ‘staying put’ deal on behalf of the lender and therefore allowing the broker to review the customer’s other financial needs? Perhaps in the not too distant future we might start to see more of a partnership growing between lenders and brokers?
So if lenders start doing more to retain their customers, can the high level of remortgage business continue, or will we begin to see a slow down in the market? It can be argued that there is still a great deal of potential for remortgage business. According to research conducted by intermediary Charcol, a staggering three-quarters of borrowers have never remortgaged.
As it is likely that the majority of these could save money by reviewing their mortgage, this opens up great potential for mortgage brokers. Also, those who have now become accustomed to reviewing their mortgage every so often are likely to continue to do so while competitive deals are still around. And even with all the good intentions in the world, it is going to take some time for lenders’ attitudes to attracting remortgage customers and ways of working to change, if indeed they do at all while competition remains so strong.
So if we are to continue to see a high level of remortgage business, what impact will this have on the housing market? The level of remortgaging is unlikely to have any direct impact on the value of homes. People may be encouraged to borrow more when they remortgage, but it is being able to borrow more when buying rather than remortgaging that affects property prices.
Some have speculated that lenders may decide to bring strong redemption penalties back in order to help hold on to borrowers and to allow them to keep remortgage rates as low as possible. But which lender would be courageous enough to do this first? All this makes it appear that remortgages have little impact on the market but this, of course, is not the case ‘ they have a big impact in terms of volumes of gross mortgage lending, which cannot be bad for brokers.
A consolidated future
Of course the market now is highly competitive and we have an oversupply of mortgage offers. Eventually though, we are likely to see a consolidation of lenders and perhaps then a reduction in supply and an increase in margins. However, over the longer term (and it is a bold person who says what this longer term is) we can rely on economics and the cycle of demand and supply to ensure that lenders do not get too comfortable.
If competition diminishes then this will open up the doors for new entrants, as we saw in the 1980s with the likes of the Household Mortgage Corporation and the Mortgage Corporation, and as we have seen with the current account market and new banks such as Egg, First Direct, Sainsbury’s, Smile and others.
Remortgage business will continue to play a big part in mortgage sales because remortgaging is a positive market driver, encouraging efficiency and competition in the market place. It is good for the borrower and for the broker and also fits with the FSA’s intentions to create an active and open market in which borrowers are given information on the best deals available to them.
49% of mortgage advances made in the second quarter of this year were to people remortgaging.
Flexible and current account mortgages are arguably one of the strongest retention products on the market.
Borrowers who are used to reviewing their mortgage are likely to do so while competitive deals are still around.