Procuration fees are the lifeblood of many mortgage brokers. Some now charge explicit fees but proc fees still matter and fluctuations at lenders can make a big difference to brokers’ revenue streams.
Stories about lenders reviewing proc fees are nothing new. In 2011 some brokers were up in arms about a potential pilot scheme between ING Direct and Legal & General that would have seen the lender offering proc fees below 30bps.
It therefore came as a pleasant surprise to many brokers to hear a story about proc fees being increased. Santander recently attached a massive 70bps proc fee for certain key broker accounts, double the 35bps average, on its 10-year fixed rate mortgage.
Enhanced proc fees were the norm in the specialist market, with sub-prime and heavy adverse deals paying higher levels to brokers.
Bridging and buy-to-let have traditionally also paid higher proc fees as lenders charge higher rates for these and can afford the extra distribution costs.
But 70bps on a relatively mainstream deal is about as high as there is on the market and it follows a pattern at the Spanish lender. Santander also offers 50bps on residential deals of five years and more and 40bps for its Flexi Mortgage range.
Last year Santander announced it would vary proc fees according to the quality of business and would design a metric to assign fees to each deal and specific brokers.
From Santander’s viewpoint, it ties in borrowers for a decade and keeps a steady income rolling through the door.
National Counties Building Society is another lender that has a scale of proc fees, but it pays less for shorter terms rather than more for longer. Its one-year deals have 10bps proc fees, two -year deals are 20bps and three-year 25bps. The maximum is 35bps on five-year deals.
PMS product and communications manager Rob McCoy says: “If brokers are selling this long-term deal then it can’t be brokered again. They could do two five-year deals and then re-broker it to earn another proc fee.
“The higher proc fee does compensate brokers for choosing to put them on a long-term deal if it suits the needs of clients. I can understand why Santander is doing it.”
Mortgage Centre IFA director Fahim Antoniades says: “Products have to stand on their own two feet in terms of Treating Customers Fairly principles. Brokers have to be fair in recommending products but they can use an enhanced proc fee to subsidise client fees.”
John Charcol senior technical manager Ray Boulger says: “Clearly if a broker is doing their job properly they should be advising clients on products regardless of proc fees,
but one can’t completely divorce commercial realities from life.
“If you are advising clients on a two-year deal the work is the same as a 10-year deal, so you could say lenders should pay the same on everything. From a lender’s perspective they need to put less into their costings on longer deals even if they pay brokers more, so it is a good commercial balance.”
Lifetime Group managing director Carlos Thibaut says: “Proc fees would not influence my business to advise on a two-, three- or 10-year fixed or variable. It is simply what is best for clients. Santander will have a 10-year funding line so they can afford to take more proc fee out of the product. Choice is good but we have a long way to go before consumers are happy with 10-year fixed deals.”
Ten-year fixed rates may not appeal to first-time buyers but could be a lucrative retirement planning tool to bring greater certainty to the final years of a mortgage.
McCoy says: “Ten-year products are very niche. New home owners will not want to tie themselves into a long-term deal when they are unsure about their jobs and what they will be doing.
“It suits someone in their late forties and thinking about retirement planning. If you have 10 years to run on your mortgage then you may jump on this deal and forget about it.”
Major distributors such as LSL Property Services, Countrywide and Personal Touch Financial Services have argued for recurring annual trail commission on mortgages. They argue they could build a business with a steady income stream and be able to plan ahead.
But lenders have been reticent. Santander and Barclays both say they have studied offering trail but it is not what brokers want.
Boulger says: “If there is a choice between trail, which some brokers want, or higher proc fees for longer-term mortgages, I would want higher proc fees. It means the income is coming to brokers at the time they are incurring costs.
“The main argument for trail is it allows brokers to build up a business revenue stream, but in terms of equating income and expenditure it is better to have higher proc fees. It would be great to have both but I doubt it will happen.”