As 2024 begins, brokers must be prepared to field what may well be the defining query of the year, regardless of if the borrower wants to move on to a new fixed rate or go for a tracker rate – to go for a product transfer, or to switch to a new lender entirely.
A new scene
First, it’s important to give some background as to today’s situation. UK Finance reports that, in Q2 2023, 88 per cent of renewal deals were product transfers, which compares to a 2022 average of 77 per cent.
Meanwhile, the Bank of England (BoE) reports that, as of September 2023, actual remortgages, in which the client moved to another lender, were at their lowest approval rate since January 1999.
Within these trends, the popularity of product trackers has steadily risen with borrowers. A greater appetite for product trackers is a logical response to the rate turmoil we have seen in the last year or so. With fixed rates rising so quickly and the greater economic background being so volatile, borrowers have been quite willing to pay a premium in the short term for the flexibility to move to a fixed product when rates settle down. Added to this is the fact that a host of lenders responded to this trend by introducing a host of features to their tracker offerings to make them more attractive.
Whether or not borrowers look to move to a tracker rate as the narrative shifts from ever-increasing bank rates to the BoE keeping rates at the current level of 5.25 per cent for now, the choice of going with a product transfer or changing lender will likely remain top of mind for many of your clients well into 2024.
It is thus important to outline why or why not a tracker might be suitable.
The pros and cons
Going with a product transfer yields many benefits. The most obvious is the saving of valuation and legal fees, which don’t have to be paid if the borrower stays with the same lender. Similarly, many lenders won’t have to perform a credit check, either. Generally, product transfers are quicker to transact as a result.
Another positive is that if a property’s value has increased, the borrower may qualify for a lower loan to value (LTV), potentially offering better rates.
So far, so good.
However, there are reasons for product transfers not being the best decision for borrowers, too. The main one is that lenders are constantly bringing out new products and improving existing ones so as to capture new business. If your client stays with their original lender, they won’t be able to take advantage of this.
Not only does this limit their options for rates, but in the make-up that new and innovative products can offer. And on the topic of fast and simple transactions, which we have listed this as a benefit, this does mean that a reassessment of needs doesn’t take place.
Quicker, yes – but it means that any changes in a client’s financial situation or needs won’t be accounted for, again limiting product choice.
Money saved but with limits
To summarise, product transfers are nothing short of a miracle when it comes to convenience and cost savings, but they do limit a borrower’s options if they want to make serious changes to the structure of their mortgage. Each of these factors must be explained carefully and clearly to your clients with their long-term goals in mind.
With rates chopping and changing as they are, it won’t be an easy answer to pin down. But that is why we are in this business.