In the latest Money Marketing June With-Profits Focus survey of mortgage
endowment shortfalls, several life offices refused to disclose what
percentage of their reprojection letters were red, green or amber. Should
they be forced to make these
Batchelor: As this type of mortgage repayment vehicle has taken a back
seat in recent times, with most consumers electing to take either repayment
or interest-only loans, it is unlikely that market-wide disclosure will
have an effect in the future upon the type of mortgage purchased. The issue
of a potential shortfall upon a policy linked to an outstanding mortgage is
one best solved between adviser, client, provider and lender.
Richardson: The important thing with this issue is that people who are
facing a shortfall are made aware and understand what steps they need to
make to rectify their situation and get back on track to pay their
mortgages. Mortgage-backed endowments are the dinosaurs of the financial
world and they are going the same way.
Lack of disclosure from life offices in this matter will just compound
their downfall as consumers seek perceived “safe” alternatives to pay off
their mortgages. Endowments will, of course, go on but mer-ely as savings
Mawdsley: Speaking as a reasonably well informed layman, I would guess
that most professionals in the industry believe they know and understand
why some companies refuse to divulge this information. As a marketing tool,
I believe the information, or lack of it, could be very useful both to
brokers and customers.
Yorkshire Building Society looks likely to be the first lender to offer
trail commission on mortgages. Will other lenders will follow suit?
Batchelor: I am aware that some lenders in the past have had trail
commission agreements with intermediaries or paid basis points on
originated mortgage books and it is int-eresting that Yorkshire is lik-ely
to launch such a scheme to protect intermediary introduced business.
For introducers, it is a regular income stream which can overcome some of
the seasonal peaks and troughs of the mortgage market. For lenders, it
makes sense not only for increased customer retention but also for the
cashflow advantage to this method of payment rather than just an initial
However, I feel that this method of payment will not be replicated by the
majority of the market as most intermediaries require cash today to run
their businesses. One issue which always arises is the potential negative
effect on a consumer in so much as the lender is tempting an intermediary
not to remortgage a client to protect income.
Richardson: Other lenders will no doubt continue to play a waiting game.
It is really a question of sustainability but lenders will not admit to
that until they have a case study in the shape of Yorkshire's experience to
draw on. The important factors will be the level of renewal commission paid
and for how long. Also, whether it decides to scrap up-front fees
altogether and pay over a few years or pay less up front and less over time.
The upside to introducing trail would be if it encourages mortgage brokers
to stop churning business where it is not in the interests of the customer
to do so. The danger for those lenders that take the trail route is that
they lose business as brokers go for the up-front fee and remortgage their
client three years down the line for another fee.
Mawdsley: Yes, although, as I understand it, some lenders have already
been down this road. Historically, lenders have always had greater focus on
new business, existing customers always came second, and retention rates
tumbled. If there is a move to a more level playing field for products,
then offering trail commission will benefit their business from the
intermediary market, positively affecting their customer retention. But
this can only be the case if they get the rest of the marketing package
If they are really interested in doing business with intermediaries in the
long term, the fees paid must reflect the efforts of their introducer for
both the initial business and the continuing retention of their mutual
Paragon Mortgages has pulled out of the retail market because it fears
that relaxed lending criteria is making the mortgage market too risky. How
far do you think this is a legitimate concern?
Batchelor: The question posed misses one important fact. Paragon
Mortgage's managing director John Heron was quoted as saying “there is
little or no return available against potentially high risks from the
combination of high demand for high loans to value, high-income multiples
and intense competition in the commodity sector. We see no purpose in
chasing this business when we have so much experience in buy to let.”
Lending of all kinds, whether for house purchase or personal reasons is
based upon the principle of risk versus reward. If there is little or no
return for a lender in a sector of the market, it becomes very difficult to
justify remaining a player in that sector.A recent CML report concluded
that there was no reduction in credit quality/lending.
Richardson: It looks like Paragon has pinned its reason for leaving the
mainstream on risk whereas in reality it probably just makes sense for it
to exit the retail market and concentrate on buy to-let where it has more
focus. Mortgage lending to consumers is just about the safest form of
lending a bank or building society can do because of the security it
affords, so I do not believe it can be the core reason.
Mawdsley: There have been a number of recent calls for the lending
industry to beware of a “relaxation” in lending cri-teria. The implication
being that there is an increased risk to the lender – and borrower?
Lenders have always faced the issues of balancing the needs and
aspirations of the customer with the probity of prudent lending. Paragon,
it must be remembered, is one of the few lenders with the transparency of a
public listing. It may be that Paragon has found it difficult to compete in
the residential sector when more profitable avenues exist in the niche
sectors of the marketplace
The Financial Ombudsman Service is being inundated with complaints from
borrowers over inappropriate loan payment protection policies sold to them
by direct agents of lenders. Should any tie-ups between lenders and
insurers – generally viewed as the problem – be made more transparent?
Batchelor: It is planned that there will shortly be further transparency
and greater control on the selling of this type of contract shortly as new
guidelines, which for the first time regulate the sale of general insurance
policies such as loan/mortgage payment protection policies come into force.
These will be laid down by the GISC and are intended to govern the
misselling of all types of general insurance.
Richardson: The relationship between providers and insurers undoubtedly
needs to be made clearer than at present. If it is not clear, then how can
the end consumer know what (and from whom) they are buying? Suitable loan
protection needs to be sold according to individual circumstances.
Providers need to ensure that anyone selling MPPI products has appropriate
levels of knowledge. In many cases, I think it is true that direct-sales
staff have minimal knowledge of the insurance policies they are selling so
it is not surprising to see a rise in complaints in this area. Improving
training and increasing transparency is essential.
Mawdsley: The catalyst for providing income protection was a change in
rules for mortgage payments by the DSS.
What failed to happen at the same time was the introduction of any
standards associ-ated with the sale of payment protection products.
Hindsight always gives 20/20 vision but I believe the acceptability of the
products sold in the early days of this immature market would not stand up
well against the products on sale today.
Since the introduction of these products the market has changed
dramatically, competition has improved the cover, and with the benefit of
experience, premium rates and the move away from single premiums has
benefited the customer. Having said that, the conditional sale of all
insurance products linked to mortgages and the relationships between the
parties involved should always be able to stand up to scrutiny.
With recent movement in money market rates, many lenders have been forced
to reprice their fixed rate mortgages. Do you think this indicates a
impending rise in interest rates and, if so, should borrowers be looking to
snap up fixed-rate products?
Batchelor: Whether there is a change in bank base rate or not, the rise in
money market rates has certainly brought about a change in pricing to many
lenders' fixed and cap-ped rates. Also, away from the many economic,
political and European currency factors which influence rates, lenders have
for some time been heavily discounting fixed and cap-ped rates.
Currently, there are two-year fixed mortgages with five-year break-even
periods, which do not have overhanging early redemption fees. How long can
this type of product continue to be offered if a lender's existing mortgage
book is remortgaging away to other lenders at an unprecedented level?
I think it is highly likely that we have seen the lowest fixed-rate
products for some time, especially if there is any stalling by the
Government on joining the single European currency.
Richardson: I think the re-pricing of interest rates by a quarter point to
5.5 per cent (by the end of this year) is an over-reaction based on the
view that the UK may enter Emu soon. The past history of fixed rates versus
variable rates show it is pretty much 50/50 in terms of winning the gamble
when deciding to fix or not.
There is always a risk and even the experts get it wrong more times than
right. The danger is losing out on lower payments if there are further
falls in interest rates. Whenever looking to fix mortgage payments it is a
good idea to go for a short fix of, say, two years with no lock-in to allow
flexibility for a change in circumstances.
Mawdsley: At the last change in the base rates, two-year money became more
expensive, a clear indication that we were at the bottom of the interest
With the Government's position on the euro becoming clearer, combined with
the apparent building of inflationary pressure in the economy, many think
the last cut in rates was one too many. The signs for a further hardening
of interest rates are there.
In my opinion, a fix today is the right choice, the next question should
be – over how long should you fix? If I were looking for a mortgage today
with the possibility of a move within the next three years, I would want
the flexibility of knowing that today's five-year deal was portable.