What impact do you believe the Chancellor's proposals for long-term fixed-rate mortgages will have on the mortgage market as a whole?
Aitken: Even if the issues around funding long-term fixed rates can be satisfactorily resolved, I wonder if they will sell in any great number. I suspect that borrowers may be very wary of tying into a long-term deal, especially as most of them have just woken up to the fact that they can switch lenders comparatively painlessly now that redemption penalties on mainstream products have largely disappeared.
Although the majority of people have a mortgage for 30 years and more, it is rarely the same one and the appetite to switch mortgages is growing rapidly. The CML has recently issued a report on The Rise and Rise of Mortgage Churn in the UK. This highlights the need for lenders to gain a better understanding of why their borrowers defect to another lender and to take successful steps to retain them. In this sort of climate, the Chancellor will have to change the mindset of the borrowing public if he wants long-term fixed rates to work.
Paterson: The Chancellor is clearly attacking the fluctuations in the mortgage market from two angles – trying to keep inflation under control and, in turn, interest rates low while at the same time maintain consumer spending within acceptable limits. I suspect that his long-term ambition is to remove, as far as possible, the rollercoaster ride that interest rates tend to go through. Given that more than 60 per cent of the UK mortgage population have variable-rate mortgages, he wants to minimise the impact of fluctuating interest rates. One way of doing this is to encourage a greater take-up of long-term fixed rates but this cannot be done by suggestion alone. I suspect that incentives and fiscal instruments will be used to encourage a greater proliferation of long-term fixed rates. Obviously, the impact on the mortgage market as a whole will be to dramatically reduce the rate-hopping that has become more and more popular in recent years. This is something that I think lenders would welcome as most of the discount market is becoming increasingly unprofitable for them as more and more people move around.
Hicks: While long-term fixed rates are occasionally an attractive option, the ability for customers to remortgage after two to three years and gain the benefits of short term fixes or discount rates far outweighs any advantages of longer-term fixed rates. For the broker market, this represents a good opportunity to remind the customer at regular reviews which again are highly advantageous. Considerations should also be given for the ability to fund an attractive rate over a 10-year period as products with rates above SVR are generally not going to seem as attractive, especially as they are likely to have significant redemption clauses, becoming less attractive for client and broker alike.
Do you believe the mortgage market is sufficiently prepared for regulation coming in – if not, what still needs to be done?
Aitken: At SPML, we are highly active in helping our packagers understand how they need to prepare for authorisation. We have a compliance team that our introducers can consult, we have already held a number of seminars and we will be doing a series of roadshows in the summer. Many other lenders are offering similar support. However, feedback from our introducers shows a widespread need for basic practical guidance on what sort of measures need to be put in place and what permissions need to be sought when applications for authorisation are submitted to the FSA from January 2004 onwards. The final mortgage rules are to be published at the end of May and this should be a great help to firms in deciding what practical measures and systems they need to set up
Paterson: I believe that big parts of the mortgage market are significantly under-prepared for regulation. I suspect that it will be easier for IFA firms, rather than mortgage brokers, to take on board the new regulations, as they have been operating within a regulated framework for some time. There is a lot more education that needs to happen in outlining the likely impact on firms of regulation and what they have to start pre-paring for. Most have a big shock coming.
Hicks: We are still waiting for final regulation so it is probably too early to say. At the advice and information end of the spectrum, the market seems to be ready for any regulation. The critical areas really will relate largely to system changes, which may be necessary for lenders and intermediaries as a result of any future legislation.
As with all development it would be highly beneficial to have a period of time to construct, test and evaluate systems before making them compulsory by legislation.
Are the changes to Islamic mortgages outlined in the Budget the spur needed to attract more providers to offer them and potential customers to take them out?
Aitken: I do not know whether removing the double stamp duty will prove to be an incentive for lenders to offer such loans. Given the complexities of Sharia-compliant mortgages, I suspect that they will remain a niche product supplied by a few specialist lenders. Abolishing the dual stamp duty is, however, to be applauded as it removes an unfair financial burden from a minority group and it is highly likely both to stimulate demand and help more people into homeownership.
Paterson: The Budget announcement is a step in the right direction for individuals looking to take out an Islamic mortgage. With over 1.5 million Muslims in the UK, this will open up the market to affordable and desirable mortgages for the Islamic community. The problem at the moment is that Muslims have to pay double stamp duty as the lender has to purchase the property, paying stamp duty that is added into the mortgage, the offer is then designed to include total interest for the period of the loan. This is done in order to avoid paying interest on the loan, which is not allowed under Islamic law. The property and mortgage are then sold on to the customer, once again paying stamp duty.
Hicks: Realistically, any innovative product to the market will attract attention, which can only be weighed after a period of time to gauge customer and professional attention. The work currently being undertaken by the CML and Treasury should provide lend-ers with an accurate risk rating and further predictive demand. This will start to allow more development by lenders of product offerings, should they see a significant advantage within the market or within their range.
Do you agree with the stance taken by Nation-wide to withdraw from equity release?
Aitken: My understanding is that Nationwide is not considering entering the home-reversion market until it is brought under FSA regulation. As home reversion is not really a loan but a sale of part of the equity in a property, it is not currently covered by mortgage regulation.
On the other hand, as lifetime mortgages are loans secured on property, they are fully covered by FSA regulation. In fact, the FSA regards this type of mortgage as a high-risk product for borrowers so it will be subject to the highest level of regulation.
With a growing ageing population, many of whom own their properties outright, this market will undoubtedly increase. One firm of advisers (Key Retirement Solutions) estimates that the size of market is currently £8.5bn and that it will rise over the next 10 years to £75bn, fuelled by the fact that pensioners are suffering low returns from savings and equity investments. If the demand exists, many lenders are likely to consider offering both types of equity release product.
Paterson: No, I do not think that Nationwide made the right decision to pull out of the equity-release market. It obviously felt that it could not sell the product competitively but, given the nature of the products currently available in the equity-release market, the safeguards are in place to ensure they are not abused. Given the rise in property values and the erosion of pension incomes, there is an increased demand for this product, regulated properly.
Hicks: The equity-release market is currently dominated by a small number of specialist providers which run dedicated teams for processing, marketing and generally selling such products. It will therefore be difficult to break into such a market where the general awareness of the current providers is high. The obvious choice if high-street providers want to remain in this market is to create links with the specialists and introduce customers to them, as we do with Norwich Union. With regard to the relative safety of this market for the customer, it still remains a matter of choice for the client but has the added security of involvement with the interested parties, generally the relatives and children of the homeowner.
Finally, the number of registered providers of Ships (safe home-income plans) will further enhance the security aspect of this market which, provided that the customer is fully aware of the nuances of the products, can provide a vehicle for further financial planning which may be necessary both for themselves and their successors.
Do you think that offering fee-paying remortgages (as London & Country is proposing) will help reduce the turn around time for remortgaging?
Aitken: London & Country is reported to have called on “Dickensian” lenders to make it easier for borrowers to switch loans. In fact, it is rarely the lenders that hold things up but more often missing information or documentation from the borrower or less than speedy solicitors. We regularly complete within five working days so long as we have a well packaged case and no third party holding up the proceedings. We also use title insurance on every deal, and this speeds up the completion process considerably. As far as giving guarantees on timescales, however, I doubt that any lender would be prepared to commit, as unforeseen circumstances could always intervene.
Paterson: In my experience, fee-free remortgages do not speed up transaction times, quite the contrary. In most cases, the solicitors working for the lender are not instructed to work on the client's behalf until an offer is produced. Since the customer does not get to talk to the sol-icitor before this time, the whole process takes far longer than in a normal, fee-paying situation. The old saying of you get nothing in life for free is a valuable piece of advice as clients can almost guarantee that the lender will be making the money back somewhere, either through extended lock-ins or higher rates. From my experience, I would advise clients to use their own lawyer, pay the fees and maybe advise an alternative of a cashback remortgage package.
Hicks: It will be interesting to see what the effect will be as customers are likely to be more interested in the more critical features of the product they're buying such as rate, term and redemption. These being especially important for clients and brokers who use sourcing systems of best-buy tables to obtain the information concerning their remortgage and, as such, the speed to complete may be secondary to the features. Generally, remortgages are less time-critical than a straightforward purchase and largely attract less attention from the broker, client or estate agent in view of this. However, any developments to provide enhanced customer benefits will be watched by lenders closely and if the proposals become best practice then more providers will enter the market for such a feature.
Stuart Aitken, director of credit, Southern Pacific Mortgage Limited
Kevin Paterson, managing director, Park Row Independent Mortgages
Jeremy Hicks, PR and corporate affairs controller, Chelsea Building Society