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Loyal subjects

  • 22/08/2003
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Refinancing existing mortgages for existing customers can be a sensitive subject but is one that brokers must address to make the most of their database

From the consumer’s perspective there is clear benefit to be had from a proactive approach to managing their mortgage. In recent years clients have become more astute to reassessing mortgage commitments and they have even started to approach their original mortgage broker at or near the time of maturity of the original product. If borrowers are keen to take advantage of 0% credit card offers why should they not adopt a similar approach to managing their largest liability, their mortgage?

Historically borrowers readily accepted that a mortgage was for life, both in terms of the duration of the loan and in staying loyal to the original provider. With the advent of flexible payment terms and the increasing popularity of two and three-year products, it now seems those days are long gone.

Interestingly what often prompts the call from the borrower is a mailshot from the existing lender advising that the original interest rate is nearing maturity. The letter will typically reconfirm the existing payment terms and offer two or three renewal options, which might include a fixed rate, tracker rate and the standard variable rate.

Historically, lenders did not proactively seek to retain customers, either simply letting borrowers revert to the standard variable rate or offering price differentiated rates which were unsurprisingly higher than those on offer for new business.

However, in recent times we have seen the establishment of customer retention teams by some lenders. In particular, BM Solutions which has withdrawn from the mainstream lending market, and adopted an aggressive and successful stance in this regard. Ironically Halifax, the parent company, has also adopted this stance but has been offering a range of uncompetitive fixed rates and a tracker rate at base rate +0.75%. The Halifax’s offerings have in fact more often than not reinforced the client’s decision to remortgage with a new lender.

Procuration fees

With regard to a broker’s involvement in the remortgage process, mention should be made of procuration fees and lenders’ enthusiasm to retain business. As the importance of the remortgage market emerged, Portman Building Society was quick to offer a procuration fee if the broker proactively switched a borrower into a new fixed rate at maturity of the original exclusive fixed rate. This system worked well and suited all parties, namely the lender, the broker and the borrower.

Since then we have seen the introduction of trail commission by lenders such as Intelligent Finance in an attempt to encourage retention and perhaps ward off churning by brokers. However 0.05% trail commission and an interest rate of 4.75% can never rival a 0.35% procuration fee and an interest rate of 3.50% for the client. Northern Rock has muted the idea of offering brokers renewal procuration fees in an attempt to encourage retention but nothing has happened as yet.

As the London market has struggled over the last 18 months brokers have become increasingly proactive in remortgaging their existing customers. This can be attributed not only to a downturn in new business enquiries and volumes, but also to an improvement in technology and systems.

However if new enquiries come in, the broker’s ability to actively manage the existing loan book is impacted by the immediate need to address new purchase enquiries which are always of a more urgent and pressing nature.

The broker may not always have the data available to be able to reassess the existing loans and may need to request the return of paper files from an archive in order to be able to advise the client. However with the introduction of key fact illustrations the broker should be able to access accurate data relating to the original recommendations. This should be further supported by a chosen administration system which ideally includes the product data, completion dates and the ability to diarise forward for rate maturities.

Extraneous factors such as divorce, marriage, change of employment, or the birth of a child will always prompt an existing client to make contact with a broker. These are, of course, events beyond the scope of influence or control of the mortgage broker.

Other than proactively contacting existing clients at or near the time of an interest rate maturity, or sending market update mailshots maybe once a quarter, it can be difficult for brokers to maintain frequent contact with their mortgage clients.

Clients are usually keen to speak to the broker at the time of reassessment of their mortgage, but attempts to sell additional products post-completion are often futile. If a mortgage brokerage offers a financial planning or building and contents insurance proposition, the sale is best done at the time of the initial mortgage transaction. Indeed a future remortgage is again a catalyst to revisit these associated product areas but in general contact between the broker and the customer at any other time tends to be limited and unproductive in terms of sales.

Regular contact is encouraged to cement client/broker relationships, although normally, other than at the time of a remortgage, time and resource is channelled into seeking new clients or introducers. A downturn in the market has seen a decline in the number of first time buyers and new entrants, so seeking out new clients has become increasingly difficult. However, this has focused brokers’ mindset and encouraged them to service the existing client bank with the objective of retention.

It is interesting to consider if brokers will still put the same energy into servicing existing clients, when there is an upturn in volumes and new business enquiries. Will they have taken on board what has been learned during the quiet times, or will the lessons be abandoned in the quest for new clients?

Under the Financial Services Authority’s proposed rules even if a client is turned down for a mortgage the adviser can then go back to them at a later date and this will not fall under the outlawed cold calling rules. It is good news that under the proposed changes a broker can do this, however it seems certain that if the client was initially declined he would abandon the original broker and leave no stone unturned in the quest for a mortgage approval. So in reality it is unlikely that approaching a client retrospectively, some months after the initial contact, would be a worthwhile exercise.

Proactive brokers

Most brokers agree that lenders are becoming increasingly proactive in retaining customers to the extent that one can almost regard lenders as a greater competitor than other mortgage brokers or the client’s own bank.

It seems that the client is often prompted to contact the original broker as a result of contact from the existing lender either by way of a mailshot or a retention phone call. The gauntlet is thrown down to the broker to try and achieve a more competitive deal for their customer, the remortgage affording a new earnings opportunity while at the same time potentially saving their customer money and thus further cementing the relationship.

However one must not ignore the broker/lender relationship and it is here the main sensitivity lies. Brokers tend to have favoured lenders and it is true to say that there will be a reluctance to actively churn those lenders’ books, whereas the broker will not think twice about refinancing other lenders’ loans.

Regular contact between client and broker in conjunction with a downturn in new enquiries and an improvement in technology, systems and compliance will assist customer retention in the long term.

key points

The FSA’s proposed rules will allow an adviser to go back to a client they had previously turned down.

The best time to offer financial planning or building and contents insurance is at the time of the initial transaction.

Trail commission has been introduced by certain lenders in an attempt to encourage retention and ward off churning by brokers.


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