Professor David Miles has sparked an angry response from mortgage brokers with his claim in his interim report late last year that brokers are fuelling the remortgaging boom and encouraging borrowers to spurn longer-term fixed deals.
Miles claimed that advisers are churning mortgage business by guiding clients to remortgage to short-term fixed-rate deals every two or three years.
The academic, who has been asked by Chancellor Gordon Brown to investigate why borrowers are reluctant to take up long-term mortgage rates, also attacked lenders for subsidising cheap deals by keeping existing borrowers on expensive standard variable rates.
But can brokers be blamed for for the lack of a large-scale long-term fixed-rate mortgage market in the UK? Council of Mortgage Lenders' figures show remortgaging accounted for 44 per cent of £27.5bn worth of lending in November 2003 while mortgages for house purchase made up 47 per cent of business. Of course, not all the remortgage business originated from brokers. Mortgageforce managing director Rob Clifford says: “The criticism by Miles of brokers is misguided, first of all because while between 40 to 60 per cent of remortgage business comes from brokers, the bulk of the rest comes from banks and building society branches.”
Miles claims that the way that intermediaries are remunerated means they are keen to sell shorter-term mortgage products that will produce churn.
But brokers say that demand for short-term deals is driven by what clients want and the need to give the best advice to borrowers.
London & Country mortgage specialist David Hollingworth says: “The bottom line is, what are borrowers looking for from their mortgage? The answer is often the cheapest rate. As a broker, you are duty-bound to give the client what they want, which is often lower-rate deals without extended lock-ins.”
Clifford also makes the point that many advisers' business models are not efficient enough to return to existing clients to encourage them to remortgage.
He says: “It is poppycock to suggest that brokers are systematically going to their clients every two years to discuss remortgaging. Most brokers just are not that efficient.”
Clifford illustrates the point with the fact that 75 per cent of Mortgageforce's remortgage business is new business, with new clients contacting its brokers with a view to remortgage.
What seems to have caused most offence among the broker community is Miles' association of the word “churning” with remortgaging. Many advisers feel the tag is unrepresentative and damaging.
Few could argue that remortgaging to bring big annual savings for borrowers is not in their best interests.
Hollingworth says: “It is difficult to square up the idea that brokers should leave their clients to pay lenders' standard rates after offer periods have ended. This is not churning, it is maintaining a good relationship with your client.”
The churning term is entirely inappropriate, says Clifford. “It originates from the life industry where policyholders are shifted from old to new policies which do not deliver them any benefits. How can you argue that moving clients to a better deal is churning when it delivers such tan-gible savings?” M2 Financial managing director Mark Howard: “Elements of what Miles is saying are a total disgrace. The prevalence of remortgaging is the way the market has been conditioned, it is not about 'churning'. The options for borrowers who want longer-term rates are extremely limited. Miles should get his facts right.”
The report also claims that intermediaries are not given incentives to explain the nature of interest-rate risks, which many borrowers do not understand.
Clifford argues that while you can tell clients about the pros and cons of longer deals over shorter ones, clients do not read longer-term rates as the security of rate certainty, they read it as the limitation of extended lock-ins.
What do brokers feel can boost the popularity of longer-term fixed rates? Hollingworth says any drive for long-term rates will be an uphill struggle. He says: “Generally speaking, borrowers are happy to have shorter-term loans without extended lock-ins and penalties. Borrowers who accepted longer-term rates in the past when rates were high were stung when rates came down but they were still paying punishing interest. Many of these borrowers will be once bitten, twice shy.”
Both Hollingworth and Howard feel that the take-up of longer-term fixed mortgages will improve only if borrowing rates become more competitive and lock-ins are shortened. This would make UK longer-term products closer to those in the US, which can offer portability along with rate certainty.
Clifford says: “There needs to be a culture change as well as changes at manufacturer level with regard to bringing rates down. It has taken us a decade or so to educate borrowers to remortgage regularly. It will probably take years to educate them that sticking with one product for longer might be the best option in the future.”