We acknowledge this is a departure from the industry norm; however, it will likely be a common feature of Paragon’s mortgage design going forward.
When we develop mortgage products, our aim is to balance the rate with any fees and ERCs. Where a product has a higher fee, we believe it is fair to give the option of lower ERC if the customer wishes to leave that product.
ERCs will vary by product but will typically be lower in the first year of the fixed-rate mortgage and then increase in years two and three, before reducing again in years four and five. In some cases, we will also utilise zero ERCs.
This approach more accurately reflects the different pricing structures we’ve introduced to provide brokers with broader options when sourcing mortgages for their clients.
We price our products with the fee relating to the pay rate; generally the higher the fee, the lower the rate. We feel that if the landlord elects to pay a higher fee to drive down the rate, they should not be disadvantaged if they then decide to redeem their mortgage in its first year.
Stability in volatility
With the market as volatile as it is, we want landlords to feel confident that they can benefit from the stability of a five-year fix now but also have the option to redeem if rates fall significantly in a year or two.
Previously, before economic instability made it necessary for lenders to diversify their product proposition to make the sums work for borrowers, there was little gap between a typical low fixed fee of £2,000, for example, and what would be one of the highest fees at 3%.
This means that you could argue that lenders could cover the cost of a borrower redeeming before the end of term by applying the same ERC structure across all products.
But, apply this to products where higher arrangement fees have been introduced to help keep rates down and borrowers could be paying a high fee when they take out a mortgage and then again if they want to redeem.
Such scenarios could leave lenders making a profit on a mechanism that should essentially only be in place to cover costs.
This doesn’t sit well with us, which is why our ERCs will now be set taking into account any other costs incurred by the borrower.
