Major lenders are fighting a price war using headline-catching low rates to attract consumer interest. Do you think the Council of Mortgage Lenders is justified in its campaign to try and force lenders to draw more attention to the redemption penalties these products carry?
DS: I think any move to encourage transparency and notify the borrower of the drawback has to be welcomed. The only thing it does imply is that all lenders are not being open and clear about it anyway. For our part, we go to a great deal of trouble to let our terms be known up front. When you think about this, it makes sense because the transaction is hopefully going to be long term and you are only letting yourself down if you try to hide anything.
NB: The CML should get lenders to fully explain redemption penalties so the customer knows what they are getting into before completion. At the moment, penalties are hidden or at least not clear enough. The barrage of figures is not easily understood.
MD: Yes. I think the mortgage market is a very simple one in terms of pricing. The decision for the consumer is quite simple. They have to decide what period of time they are prepared to commit to the lender and in return for that you get a certain choice of rates. Selling something as a five-year fix when actually it has a three-year tie in is something of a deception. The large networks and high-street lenders are getting into this because they are finding it very difficult to sell in terms of services and choice.
If a borrower was paid in euros and they approached you for mortgage advice, would you recommend they take out a euro mortgage?
DS: At the moment, we do not do euro mortgages and we would refer them to an IFA for advice. That aside, it very much depends on what interest rates are going to do across Europe. The signs are that interest rates are going to fall again. The main problems would be consumer choice would be severely limited and what would happen if you changed to a job that paid in sterling and not in euros?
NB: It would depend on where the property was, whether it was in Europe or the UK. Actually, even if it was in Europe, I would not recommend a euro mortgage considering the interest rate fluctuations. The currency has not settled down enough to a sensible track record. So I would say my recommendation depends on the performance in the medium term. It is too early to take out a loan on the back of the euro. I would leave it a few years.
MD: Selling a euro mortgage to workers earning, say, £30,000-£40,000 is an absol ute disaster waiting to hap pen. You could end up with a home-income plan issue where debt could spiral and end up being more than the property is worth. For most people, it is entirely inappropriate.
Do you think Standard Life will be successful in achieving its goal of grabbing 10 per cent of the new mortgage market in 1999?
DS: I would be very surprised. They have made a very good start but I have every reason to believe this year will be every bit as competitive as last year. If they do, they will have to spend a small fortune on advertising and marketing because they are not widely recognised as a mortgage provider. They will also have to be very competitive with their pricing. It is very difficult for a new entrant, even one as large as Standard Life, to make an immediate and significant impact in its first year.
NB: Yes. It is ambitious but their products are superb. I'm pro-flexible mortgages and success depends on whether their service lives up to the promises in terms of speed and turnaround time. They have come into the market after everyone else has played around with it. Basically, they have good products, marketing and people.
MD: I think Standard Life must know something the rest of the mortgage market doesn't. They are aiming to take 10 per cent of the market, yet they only have access to 60 per cent of the channels involved. I just can't see them persuading one in six people to take out a mortgage with them. I think they will be successful but I don't think they will take 10 per cent of the market share.
From the borrower's point of view, how important is it for building societies to retain their mutual status?
DS: If you look at the standard rates currently being offered, then it is clear there is a distinct difference between banks and building societies. Banks need the competition of building societies to keep rates low. I think the real benefit of building societies will be seen if the UK goes into recession. Because mutuals do not have shareholders to think about, they will be under less pressure to enforce measures that will penalise the consumer.
NB: At the moment, the building society standard variable rate is half a point below the banks' rate, so there is an advantage to societies remaining operational. But as the base rates fall, they will find it harder to compete. The balance might tip and they will be undercut by the banks. The problem is a society has to persuade you and I to invest and, if rates fall, they may offer less interest to investors.
MD: The big question I have about the mutuality issue is, if it makes so much sense, why is it only in the last two years that they have decided that they can be cheaper? What happened to all the years before? It's easy to say a nationalised business should be more profitable because it doesn't have shareholders to pay. But that is not always the case.
What will have happened to house prices by the end of 1999?
DS: I'm not an economist but I do believe there will be a slow and gradual increase in prices. The signs are that we are moving away from a recession and the succession of rate cuts we have seen is boosting consumer confidence. People are not so concerned about job security and there is a definite upbeat feeling in the housing market.
NB: I don't think 1999 will be very exciting to the house market. In my opinion, it won't fall but will grow by a steady 5-10 per cent because people are worried about their jobs and are reluctant to take out a large mortgage. Therefore, any increase will be minimal.
MD: They will rise by about 1 per cent. There are two factors that drive the economy. One is economic reality but the more powerful factor is consumer confidence. It is people that pay the prices not the economists. It is not so much an affordable issue that will hold back prices but the issue of job security.