A couple of weeks ago, I was sitting round a table with a bunch of friends, having a few beers. One of my fellow-drinkers, thinking that I was an expert in these matters, asked me what the “best” mortgage for him might be. It turned out that his two-year fixed loan was coming to an end and he is searching for an alternative.
I hate questions like this. They get in the way of drinking time and leave everyone else listening in on the discussion totally bored to tears. They also imply you are an “expert” in mortgages or other financial matters and I am not.
What amazed me this time, however, was that everyone seemed to be, well, if not riveted, certainly interested in the conversation. It dawned on me that over the course of the next 12 months or so, almost everyone there will need a new mortgage when their current fixed or discounted rate comes to an end.
In many cases, those present were on some form of tracker mortgage and although they had enjoyed the benefits of the past two years’ low interest rates, they were starting to get twitchy about the prospect of a Bank of England bank rate rise later this year. In due course, every one of them will make a decision about their loan. Most will do so after talking to their existing lender. This is in line with current figures from the FSA, which suggest that about 50 per cent of loans are now taken out directly through a lender.
If so, the chances are also high that they will opt for a non-advised transaction. Statistics indicate the majority of non-advised transactions take place when borrowers go directly through a lender.
Yet what was striking about our conversation that day was that in every single case, when I asked if they would be taking advice before they chose a new mortgage, my friends told me they would be.
Now, either I have the most advice-needy friends in the country or there is a massive lack of understanding of the process. Borrowers may think they are being advised but, In fact, they are simply being offered a mortgage and some information to go with it.
The truth is that the system is not working. It is quite clear that the FSA’s definition of “advice” is totally different to that held by the vast majority of consumers.
Right now, this is not as important as it might have been three or four years ago. At the height of the housing boom, tens of thousands of new property buyers were flocking to lenders and intermediaries.
Many of them were, in hindsight, not the most appropriate borrowers. Today, by contrast, most lenders dole out their mortgages with an eyedropper. But that still leaves millions of legacy clients they need to deal with in the next 18 months, as interest rates are expected to rise.
Last November, the FSA published a mortgage market review consultation paper on distribution and disclosure and asked if it should continue to allow people to get a mortgage without advice.
The Association of Mortgage Intermediaries’ response is for mortgage advice to be mandatory for most people, particularly first-time buyers, credit-impaired borrowers and those borrowing into retirement. By contrast, the Council of Mortgage Lenders and the Intermediary Mortgage Lenders Association believe customers should be able to choose between advised and non-advised transactions.
Reading some of the comments on the issue in the past few months, it is hard not to avoid the conclusion that both sides are engaged in a battle over future income streams. To this end, consumers’ presumed “needs” are being dragged out and waved about in much the same way as a reliquary is used to head a religious procession – to impress the masses and show that God is on your side.
My own view is that, oddly enough, I agree with elements of both sides’ arguments. The AMI is right to say that consumers – especially new borrowers and the financially impaired – should receive advice before they take out a mortgage.
But that is different from making it compulsory – people should be free to make their own decision, based on a clear understanding of the risks involved for them if they make the wrong decision.
The issue, it seems to me, is that of disclosure. The regulator ought to have very clear guidelines in place, whereby lenders are forced to inform that lenders – and intermediaries – make very clear to their customers the difference between advised and non-advised sales, what the potential consequences of a non-advised sale could be legally, that the range of mortgages on offer by a lender may not be whole of market.
Customers should also be told the presumption in some categories of borrowers is that they take advice and if they do not, they must sign a form saying they are choosing to take the non-advised route.
Over the past five or 10 years, what has become increasingly striking is that advisers – in whatever area of the market – have abandoned the notion of full status and product disclosure. It is time for independent advisers to claim it back.
Nic Cicutti can be contacted via firstname.lastname@example.org