Brokers canvassed by Mortgage Solutions said that, on average, mainstream lender proc fee for purchase cases was around 0.4 per cent, as are remortgage proc fees. Average proc fees for product transfers stand at around 0.2 per cent.
Sebastian Murphy, group director of JLM, outlined an example where for the average property in UK costing £280,000 for a remortgage, a broker could secure a £980 proc fee as opposed to £490 for a product transfer.
He said: “We are being paid half and that makes a significant difference.”
Proc fee disparity creates income gap for brokers
Charlotte Nixon, mortgage and protection proposition director at Quilter, said that there was a hefty financial impact on broker firms, noting that many had seen a downturn in purchase business since the mini Budget.
She continued that since Q3, there had been a slowdown in new mortgage business, leading to a fall in income. Nixon said that the financial impact was delayed as it can take around three months for average mortgage commission to be paid.
Nixon explained that it was helping its advisers understand that although there are a lot of product transfer opportunities this year they pay lower commission, potentially leading to income gaps.
“As an adviser, you should be looking at other ways that you can kind of plug in any income gaps… whether it’s wealth, protection or general insurance,” she noted.
Nixon said that a broker would still need to complete a full review of the client’s needs and current situation to ensure that the product transfer or remortgage was the right solution.
“It sounds like quite a simple transaction, but the advice process and the requirements from a compliance perspective will still be the same. It’s still quite a lot of work and probably the same process,” she noted.
Volatile market conditions increasing product transfer admin workload
Murphy continued that the argument is often that product transfers do not require the same administrative work as a purchase case, but volatile market conditions meant this was not the case.
Murphy said that rapid product changes brokers were now carrying out “large elements of the process” two, three or four times.
He added that in his company product transfers now accounted for 90 per cent of product transfer versus remortgage activity. This was previously 35 per cent product transfer versus remortgage.
Murphy noted this was due to borrowers not wanting to borrow more and pricing improving for product transfers.
“How can we assess foreseeable harm and suitability if we are only carrying out half the job? Consultants that say product transfers are much quicker are providing poor service,” he added.
Rhys Schofield, director at Peak Mortgages and Protection, agreed, noting that proc fees had not changed in years despite the administrative work for brokers increasing.
“Lenders should seriously look at their proc fees bearing in mind that they are saving a significant cost by not having as heavy a compliance workload on their shoulders,” he added.
Anil Mistry, director and mortgage broker at RNR Mortgage Solutions, said that his firm had seen “significant growth” in product transfer business as clients wanted to secure rates quickly or had limits on remortgages.
He added that increased proc fees would show appreciation for brokers’ loyalty and discourage them from transferring mortgages to other lenders.
More fixed rates maturing increasing product transfer volumes
Another factor is that more fixed rates are maturing this year, so the volume of potential product transfer cases is growing.
UK Finance figures project around 1.5 million residential mortgages will end this year.
The proportion of people opting for a product transfer is growing with 87 per cent of remortgagors opting for a product transfer with their lender in 2022, according to UK Finance. This is up from 80 per cent in 2021 and 73 per cent in 2019.
This trend has continued into the first quarter of this year, with external remortgaging contracting and product transfers growing. UK Finance added that the latter would become more popular due to affordability pressures.
At the end of last year, the company said that it expected product transfer volumes to rise to £212bn, up from £197bn in 2022.
Figures from the Intermediary Mortgage Lenders Association (IMLA) for the first quarter of the year show that product transfers make up 14 per cent of the average business mix for brokers. This is a percentage of all cases per year.
This is an increase from 10 per cent in the same period last year, 11 per cent in 2021 and nine per cent in 2020 when records began.
Murphy said that lenders thought they could “get away with paying less for a product transfer because they are”.
“I think we do need to have a sea change, with Consumer Duty coming in and the extra time that brokers and intermediaries, and even lenders, need to spend going forward.
“We’ve got to get rid of these cheaper conditional deals and we have got to get rid of the old “product transfers don’t take very long” argument because they take just as much time,” he added.
Consumer Duty mixed bag for proc fees
Matthew Jackson, director at Mint FS, said that product transfers were viewed as a “non-advised sale” and therefore warranted a lower fee.
However, he said with the FCA and networks requiring brokers to check whole of market products before recommending a product transfer, and it being recorded as an advised sale in most documents, lenders may struggle to maintain this position.
“The broker community is asked to maintain, service and advise their lending book – I think it is about time they paid a fee equal to that for a purchase for this work,” he said.
Tony Crane, founder of Crane Consulting, said that historically brokers have “undervalued the benefits of advice”, so the proc fee income had made up a greater proportion of total case income.
“Consumer Duty should help ensure fees match benefits – and that could mean advice costs go up – so if the work on product transfers is becoming more complex then it might mean an adjustment is required to the commercials but that doesn’t mean proc fees are automatically the right lever to pull,” he noted.
Crane said that a lender could offer a referral fee as opposed to a full product transfer proc fee and that could reward the broker for customer retention but “fall short of asking the broker to complete the full transaction”.
Product transfer proc fees should have ‘minimum standard’
Brokers said that ideally, product transfer proc fees should mirror purchase proc fees but said that there should be a minimum realignment.
Murphy said that 80 per cent should be the minimum standard with at least a £250 being the least amount that a broker could receive.
He said Halifax offered the same proc fee for product transfers and purchase, so it was a “mystery as to why their contemporaries pay less”.
Amanda Bryden, head of Halifax Intermediaries and Scottish Widows Bank, said: “It’s great to hear our approach to product transfer proc fees is still well received by brokers.
“We have always had the view our proc fees should reflect the level of work involved, and we understand that brokers have an ongoing role within the client-lender relationship. Pricing is always a balance and something we keep under review, but we see the cost of procurement fees on product transfers as something that provides value.”
TSB said that it paid 0.4 per cent for purchase and remortgage and 0.3 per cent for product transfers.
Sources said that the difference reflected the workload of the broker as product transfers did not require packing or pre-completion administration by the broker.
Nationwide said it benchmarked its proc fees for purchase and product transfers against the wider industry on a regular basis and it believed they were set at the right level.
A lender source who wanted to remain anonymous said that product transfers did not require paperwork to submit to a lender and did not require credit searches or the need to verify income – the broker just had to provide the advice.
They added that the completion rate for a product transfer was around 100 per cent, so there are fewer fall throughs.
However, they noted that there was an argument that while some lenders were not paying sufficient proc fees, the majority of the market is.
They continued that the way regulations are written means that proc fees cannot be used as a way to gain business, therefore among the top 10 lenders the proc fees tend to be pretty consistent.
They added that it was currently an abnormal market so whilst they were sympathetic to brokers working harder, this was not the norm and therefore proc fees should not change.
The lender noted that bank margins were actually a lot thinner due to rising swap rates so providers weren’t able to pay larger proc fees.
