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Chilton on mortgages

The most striking thing about lender discussions this year is a real desire to improve margins on their mainstream books. This has always been a pretty clear objective but there is a new determination in the way this is being expressed and it is being evidenced by the reluctance of the mainstream lenders to embark on a price war despite market volumes being depressed.

Most are expressing concern about increasing provision levels. It is as certain as night follows day that the interest rate increases we saw last year, which may now continue afresh into the new year, will lead after a 12-month lag to heightened arrears. We are already seeing this in increased repossessions coming into the equation.

Significant proportions of this new provisioning appear to be arising from non-prime lending and yet this is precisely where lenders are fighting for market share currently being fought hardest on buy-to-let and the near prime areas. This may smack of illlogicality but in terms of delivering volume and profit to the bottom line, a position that is attractive to analysts, it is no doubt a consistent thread that will continue to dominate the market for at least the first half of the year. As ever, when shortfalls are seen in mainstream market share in the second half, it is highly probable that lenders will revert to the old ways and a price war will re-emerge.

How does the intermediary capitalise on this situation. Interestingly in the prime sector, the arguments that have raged in the trade press about MCOB being interpreted that cheapest, whatever that means, represents best advice become challenged. With relatively small interest rate and real cost differentials appearing in the mainstream market, identifying other factors which represent genuine good advisory practice become much more pertinent. In simple terms, it is much easier to justify a service or speed proposition when cost differentials are relatively low. Herein lies opportunity.

The very factors that represent genuine reasons for best advice, such as the certainty of access, provided by certain lenders’ online decisioning, where it represents a real decision, offer both enhanced certainty to the customer, a strong sales factor and lower cost to the intermediary. This virtual circle is worth examining. There has been a lot of recent discussion about the value of online decisioning. Currently, only one lender, GMAC-RFC, offers binding decisions online but a number of others in reality act as if their decision is binding. This contrasts with any number of lenders, whose acceptance in principle is nothing of the sort, with a case in effect being comprehensively re-underwritten on receipt and original decisions overturned without any new factors emerging. The winning lender/intermediary formula has got to lie with the certainty provided by the former group.

Similarly, for many clients, speed is becoming a more important factor. With the first half of this year showing customers exiting the lowest ever two-year fixed-rate products the market has seen, most will want the certainty and speed that ensures that if they remortgage, they seamlessly switch into a lower rate.

For the next few months, we have an opportunity to genuinely comply with MCOB while driving business in a direction which the lowest costs and therefore highest margin solution. This is nothing to do with procuration fees, it is simple business efficiency.

If intermediaries really focus on this opportunity, the winning lenders will be those which have certain decisioning mechanics combined with excellent admin as for once they need not necessarily lose a price war on this basis. We will have to see how the market responds to the opportunity.

Mark Chilton is chief executive of Purely Mortgages

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