For IFAs feeling the regulatory heat and the pinch of stakeholder, selling mortgages could be an attractive option.
Diversification could be the key, if not to survival, then at least to bolstering the comfort zone. Alliance & Leicester key account manager Merdad Yousefi says: “Mortgages are an ideal catalyst for IFAs to generate additional income and provide an opportunity to sell clients more than one product at a time. Remuneration is likely to be better than for endowments or stakeholder.” He adds that A&L sells around 50 per cent of their mortgages through IFAs.
Like many in the industry, Bradford & Bingley head of IFA products Geoff Mills says that IFAs are eminently suited to giving advice to potential mortgage borrowers.
If they do not already do so, selling mortgages is a logical extension to the service IFAs provide, allowing them to give financial advice across the spectrum, says Mills. Not only can IFAs provide specific advice relating to individual products, they can also give advice on investing in property as opposed to anything else. Wealth management needs to include mortgage advice.
And there are a wealth of different mortgages on the market at the moment. The staple repayment mortgage combines a monthly capital repayment with an interest charge, much like a conventional bank loan. There is no in-built life assurance.
With endowment mortgages, interest is only paid on the loan, and the borrower makes separate monthly payments into an endowment policy. Life assurance is built in. At the end of the term the endowment is meant to provide the borrower with a lump sum to pay off the initial loan, with the possibility of a tax-free bonus. However, if the insurance company has misjudged, there is the danger that the final amount paid out might not cover the loan.
Given the recent complaints about endowment mortgages, it is likely that many people will be considerably more careful about the advice they take in future. IFAs are responsible for only a fraction of the misselling of the direct providers – a factor that could be capitalised upon.
Then there are Isa mortgages – introduced to improve on the short-comings of endowment mortgages. They consist of an interest repayment and another monthly payment, this time into a single or series of Isa savings accounts. Some think of them as a relatively complicated product that appeals to the financially sophisticated. They are also a new product, with unknown long-term performance .
The pension mortgage is aimed primarily at the self-employed and consist of two parts. As well as monthly interest payments on the loan, borrowers also make contributions to a pension scheme. This should provide a pension on retirement, as well as a tax-free lump sum to pay off the original loan.
With a flexible mortgage, rather than pay a set amount every month, the home buyer has the option of taking repayment holidays and making both overand underpayments without penalty.
Often they include a cheque book facility and interest on the loan is calculated on a daily basis. Sometimes existing debt can be added to the loan to take advantage of lower interest rates. While home buyers could end up paying off their loan early, the danger is that they might succumb to temptation, take too many payment holidays and find that the mortgage is not paid off at the end of the term.
An increasingly popular option is the current account mortgage which combines all your finances in one package. Some might find the prospect of having their home loan appear as, in effect, an overdraft a little off-putting but the borrower can take advantage of the daily calculations of interest by having his or her salary paid in direct.
These are just a few examples. There are mortgages for the self-employed and contract workers; mortgages targeted at expatriates; so-called “green” mortgages for the environmentally minded; buy-to-let; cash back; fixed rate and capped; discount, tracker and retirement mortgages.
Distribution channels are varied. Mortgage providers either deal directly with IFAs, or through mortgage clubs and arrangements with the networks.
DBS, for instance, has developed an independent services arm so they can provide assistance to the greater number of members authorised to sell mortgages. DBS head of development John Ainsley says that last year members of his own network were responsible for around 30,000 completions. He sees the selling of mortgages as an integral part of the IFA business.
The network provides sales and marketing assistance, together with education and regulatory support. Unlike the mortgage clubs run by Scottish Amicable and Legal & General, the network mortgage services arm of DBS does not operate as a panel.
Ainsley says: “If you deal exclusively with one mortgage club and are limiting the products you are offering, you could be seen as not giving fully independent advice.”
Procuration fees and commission for any ancillary products are negotiated either by the network or mortgage club, or by the IFA directly if they are not part of a network.
Some providers are reluctant to disclose commission levels or procuration fees. Alliance & Leicester does not release commission levels but says they are in line with market rates and are negotiated on a case by case basis.
Nationwide says the commission for selling a mortgage is set at £200. Again, Nationwide deals directly with smaller IFAs or through mortgage clubs, and it says intermediaries have access to all its products.
The Yorkshire Building Society also stresses that the entire range is available to IFAs. Yorkshire BS press officer Tanya Mills says: “It is important to our mutuality ethos that all products are available to all.” Commission levels are negotiable and are determined in relation to factors such as volume.
The mortgage market now has such a wide range of different products that advice would be eagerly sought out. IFAs are the natural source of advice, particularly in the case of investment repayment vehicles such as Isas, which IFAs such as Pretty Financial partner Kim North increasingly advise clients to take out.
The advantage of selling mortgages is obvious, but still worth pointing out. Yousefi says: “A client to is more likely to make repeat purchases of a mortgage than a product such as a pension. Who is going to buy half a dozen pensions?”