The onslaught of the mortgage wars took a new turn recently when Standard Life Bank and several mort...
The onslaught of the mortgage wars took a new turn recently when Standard Life Bank and several mortgage providers announced they would no longer accept remortgage business.
Alix Rowland at Standard Life, explains why product providers are shying away from potential business and backing out of the mortgage rate battles.
2001 has been the year that media coverage of the mortgage business has come out of the ghetto on to the front pages of the nation's tabloids. We are living in the age of 'MORTGAGE WARS'; great for the PR man but confusing to the customers all of us in the mortgage industry wish to serve.
The reason for this outbreak of hostilities is the big issue facing traditional lenders: the front book/back book divide. Existing customers on uncompetitive standard variable rates have been used to subsidise new customers. Loyal customers have paid for the deep discounts and fixed rates out of line with the money market rates that have been used to attract new customers.
Now, lenders have decided this proposition is no longer sustainable. Competition has intensified with new entrants to the market, led by Standard Life Bank.
Remortgaging is more common too. According to figures from the Council of Mortgage Lenders total remortgage lending in the first six months of 2001 was up 79% on the same period in 2000.
Another reason for volatility in the mortgage market is increased media awareness. Customers are better informed than ever before. Personal finance supplements enhance the lifestyle sections of our Sunday papers. I swear these sections get bigger every week.
So lenders are facing a double whammy. The profitable back books are diminishing as the increasing numbers of better informed customers take their custom elsewhere. But the front book with loss leading rates has real retention issues. The rate tarts are better informed and less loyal and lenders are struggling to retain new customers for long enough to recover initial incentives.
The newer lenders have anticipated these problems but have no real front book/ back book divide. The traditional lenders have now realised that they will have to bring their books together.
A word of warning: beware the smoke and mirrors. While it is true that traditional lenders are adapting to highly competitive conditions in the mortgage market, don't believe all the spin. Some lenders are developing the habit of announcing cuts which may not come into effect for weeks afterwards. They see no reason to pass on these benefits to customers immediately.
A number of lenders are guilty too of pandering to the laziness of their apathetic customers. Too many borrowers are unaware that their SVR will remain unchanged unless they get on their bike and inform their lender that they, please, would also like to benefit from the cut. Never mind the lenders who continue to calculate interest on an annual basis.
Of course, we are talking about the mortgage business. Lenders are not suddenly becoming philanthropic. While traditional lenders are adapting to a new environment, they are not doing so too quickly.
What does this mean for the short term? Fears over a possible recession in the U.S., on the back of a slowdown in the world economy, have led to a succession of interest rate cuts in the U.K. that lenders have passed on to borrowers.
However, it would be dangerous for independent financial advisers to assume that base rates and standard variable rate movements will continue to mirror each other. Indeed, this new close relationship could be shorter than you think. At some point in the not too distant future, there has to be a natural floor below which standard variable rates will not fall. After all, mortgage banks have the needs of savers to consider. So do not expect standard variable rates to push significantly below 6%.
Nonetheless, in the long term, competition pressures are not going to lessen. Gazing into the future, some trends can be identified. First, I believe we will see the gradual demise of discounts and loss leading fixed rates. The death throes of such products may take a while but they will happen because such offers are unsustainable.
What propositions should IFAs be looking for? Given that the importance of short term incentives must diminish, the key will be the importance of selecting a lender who has the ability to offer a competitive and sustainable standard variable rate over the long term.
Lenders exhibiting certain qualities will be in the strongest position. Mutuals will have an advantage, having the ability to pass on savings to their customers, not to their shareholders. Economies of scale and slick and efficient processing capability will provide IFAs and their customers with the best products and fine quality of service.
The winners will be lenders who are cost effective. Mutuals and telephone banks will continue to benefit from the advantage of lower costs.
The ability to differentiate between competitors offering the same standard variable rates will enable particular lenders to stand out from the crowd. Added value will be king. As customers become better and better informed, they will seek to benefit from additional features such as daily interest, the mechanism to overpay or take a payment holiday without penalty. Flexibility will continue to soar in popularity and more and more customers will use their mortgage as part of their wider financial planning.
In short, rate wars cannot continue on a downward spiral forever. The lenders most likely to benefit in the long term will be assisted by the advantages of mutuality, economies of scale, processing ability and innovative product design. What the customer wants, that customer will get.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation