Mortgage churning stands little or no hope of every going away. The angry debate between certain lenders and the broking community will continue. The two factions have no real common ground to reach consensus as their interests are completely polarised.
Twenty years ago, a pricing cartel existed among lenders with attractive margins being retained on a purely vanilla variable-rate product. This encouraged more capital into the lending market supported by the advent of securitisation.
The resultant overcapacity is at the root of the ongoing price war, which has lead to churning. The customer was further empowered by the emergence of new product options, with innovation continuing today. In parallel, his position became enhanced by the freedom of information on pricing that the press and latterly the internet has brought along.
Naturally, all lenders hate what they see as churning. But they only have themselves to blame following decades of non-existent customer care and overcharging. It is far too late to turn back the clock and even if the intermediary market did not exist, customers would be actively pursuing better deal themselves.
Those very consumers recognise the changing appeals of different products at different times so the dream of a lifetime low-margin variable rate will never meet a thinking customer's requirements. The killer argument is that for as long as existing pricing models remain, a borrower will always be better off if wedded to variable-rate loans by taking the best discount products without overhangs and remortgaging at the end of the discount.
The advent of flexible loans might have mitigated this effect were it not for overcapacity in this sector, which increasingly is following the main market in price-led incentives.
The real churning issue lies with brokers. A broker's only responsibility is to his client and is to advise on the most appropriate deal. That advice should increasingly in the current world economy be based on the client's risk profile as well as pure price.
In today's low-rate and inflation environment with a relatively uncertain world outlook, best advice for the majority of borrowers is longer term fixed or capped rates .Yet, consistently, the major fee-based brokers continue to advocate twoyear discounts using largely spurious arguments, as generic best advice.
They continue this in practice with their mortgage business massively predominated by two-year no overhang deals. The harsh reality is that their advice is being influenced by the opportunity to churn every two years rather than every five or seven year.
In a commission-lead environment, both the individual advisers and their firms cannot help themselves building a more profitable business this way. Yes, it may be tricky persuading a client to pay a small premium for the safety of a fixed rate but they are meant to be advisers, not bucketshops throwing off the cheapest deal. The broker's dilemma is compounded by a further commercial conflict with lenders. With exclusive products, the lenders are even more exposed to the risk of churning at the end of the initial rate period.
Yet the brokers know that their customers have become rate chasers, particularly in the bigger loan market.
So, does the broker remain passive, knowing his customer may go to one his competitors, or does he actively rebroke the customer and thereby incur the wrath of the lender who has probably not made a cent of the customer in the initial rate period?
One thing is certain – the cutomer's interests lie only third in their priorities.
Mark Chilton is an independent mortgage consultant