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Back book to the future

Borrowers have been encouraged to move between mortgage deals but now lenders face the problem of encouraging them to stay. Mortgage Intelligence managing director Sally Laker looks at how lenders are approaching the challenge of client retention

Client retention is the current hot potato for most lenders, whether they are mainstream or niche players.

Given the continuing trend of offering eye-catching deals to attract new borrowers, it helps to balance the cost if lenders can retain existing borrowers on standard variable rates, which are much higher.

This is starting to prove more difficult as borrowers become increasingly aware that they can switch lenders. Of course, this is key to the remortgage market for intermediaries.

As the pot of borrowers willing to remain on standard variable rates diminishes, lenders are trying to think of ways to retain their customers.

Another reason that this is an increasing challenge is the lack of overhanging redemption penalties. Seven or so years ago, virtually all new deals had redemption penalties locking in borrowers for another one or more years on the standard variable rate. As interest rates began to fall, better and cheaper deals emerged with no overhanging redemption penalties. This meant that borrowers were free to switch as soon as their deal came to an end.

This trend has reduced the number of borrowers who will be financially worse off if they switch, as they have no redemption penalties to pay. In fact, most will be financially better off if they switch.

A possible solution for lenders would be to offer a more exciting range of products to existing borrowers and pay the broker a fee for arranging it for them. In the past, there has been no incentive for brokers to send borrowers back to their existing lender and, for the main part, product ranges have been less than exciting.

Many will remember when Nationwide took the brave step of offering the same deals to all its customers. It may have been exp- ected that many lenders would follow its lead but this did not happen. In fact, other lenders eagerly filled their boots with new customers.

Some of the lenders that now offer existing customers access to the same range of products as new customers are GMAC, Intelligent Finance, Principality, Cheshire, Co-op, Derbyshire, Coventry, Cambridge, Chelsea, Norwich & Peterborough, Nationwide, Bristol & West, NatWest and Scottish Widows.

However, the broker does not receive a procuration fee if they recom- mend that their client stays with these lenders although they could charge a fee.

But while we may be moving towards more brokers charging fees for advice, many still prefer to receive a proc fee. So a few lenders offer the same products for existing customers as new ones and have introduced a proc fee for the broker if they keep the client with them. These include Leeds & Holbeck, First Active, Accord Mortgages and Woolwich – under a pilot scheme.

The fees vary but are generally between 0.2 and 0.25 per cent. It is inter- esting to note that two of the lenders – First Active and Accord – are relatively young and therefore have less of a back book problem.

The next question for the broker is whether the existing lender’s deal is best advice and this is not always about price. If a broker has continually received bad service from a lender, they will be reticent to consider staying there. They could end up having to do twice as much work to get the deal through in time.

Obviously, the financials need to be right and, if there is a better deal elsewhere and it is financially better for the borrower to switch lenders, then that may be best advice, irrespective of any proc fee offered.

I feel the proc fees currently offered for retaining business are small in comparison with standard proc fees and, while they are a step forward and better than nothing, they are unlikely to be seen as attractive.

In fairness to the broker, they will still have to do all the research and arrange for the paperwork to be done, so their time will be much the same for switching or staying. If there is a big loan involved, just a slight improvement in rate could make all the difference.

Most remortgage deals have free fees, which reduces the cost of switching to another lender. Of course, with online functionality, the process is more streamline. Therefore, it may be better to switch than to stay.

The additional borrowing may not be within the existing lender’s criteria, which again could be a reason for switching. However, where there is a need for the transaction to be done quickly, there is a case for remaining with the existing lender, as the process should be faster, as there is likely to be reduced underwriting and a shortened application form.

So what about the future and the back book problem for lenders? No doubt lenders will be carefully monitoring the success of those pioneering the proc fee for retained business.

It will ultimately be brokers who demonstrate the success of this initiative. Personally, I feel it is a real step in the right direction but that often the circumstances will dictate a switch. However, there are times when to stay with the existing lender is the best advice and it is only fair that the broker gets paid for demonstrating this to the customer on behalf of the lender.

One thing is for sure – lenders need a solution to a diminishing back book and, although this will help, it is unlikely to solve the ongoing problem.


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