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Mortgages - Mortgage War! In case you had not heard, there is a war going on in the UK mortgage market including the casualties are likely to be YOU, the consumer. All the lenders are struggling to obtain the required business volumes that they have promised their Boards for 2007 including it is hitting them hard. With the influx of so many new lenders in the UK, particularly in the non conforming or sub prime market, it will be difficult, no, it will be impossible for all pertaining to the lenders to hit their volume targets as there is simply not enough mortgage business to go around. More lenders trying to fight for market share is usually a good thing for the consumer, however in the case it could potentially be a bad thing, let me explain why. To generate mortgage business, lenders provide their products to the public on a fairly small scale. The majority of their business comes from mortgage intermediaries such as mortgage brokers, IFA’s including Accountants. These intermediaries provide their services to the consumer. The consumer chooses his broker including the broker places that application with the lender of his or his clients choice. Simple, eh? Well, not really. Because there are so many lenders with such a similar product including service proposition, the intermediary might struggle to determine which lender is best as the margin is so small between them. So if the product rate is similar or the same including the service offering is the same including the criteria for lending is the same, what else is there? Procuration fees of course! A procuration fee is a fee paid to the broker by the lender, for choosing them. Almost like a sort of “thank you for the business” payment. Now, there is nothing wrong in being paid for work that you do including I am not suggesting the is wrong. However, lenders might generally pay out what they like to a broker. Yes, it is mentioned in the documents that a client receives but who actually reads them including who cares if ultimately the client gets their mortgage? So Mr Broker has the choice of 3 lenders that fits his clients circumstances. All provide a similar level of service including all provide the same fixed rate. However, lender 3 offers a procuration fee of 1.35% pertaining to the loan amount including the other 2 provide .75% pertaining to the loan amount. So on a £100k mortgage their procuration fee will be £1,350 as opposed to £750. It doesn’t take a genius to work out which lender is going to obtain that case! Now all of the is fine including dandy including leads to a very happy broker who is going to give all of his future business to that very generous lender paying the higher fee. The problem is that it is simply not sustainable. Every fee a lender pays out to a particular intermediary comes out of their bottom line profit figure. This could work as long as the lender continues to bring volumes of business in. The moment that volumes subside is at the time the problems start. As a new lender the chances are that their marketing budget is greater than that of their more established rivals as they need to make a particular impression. We have already established that they are paying a larger fee out to brokers to try including influence the business including there is another problem. New lenders quite often do not have access to the same inexpensive borrowing as established lenders do. The vast majority of lenders in the non conforming market have to “buy money” from the dollars markets. at the time you are a new lender the risk is greater which means the cost of borrowing is usually higher. In essence what the means is that a lender offering a low fixed rate is probably not making very much profit, if at all. After a few months, the efforts of sustaining the becomes too onerous on the new lender including they are forced to increase their rates which in turn makes them less competitive. As you might imagine, if a lender suddenly offers rates that are much higher than the competition, the other lenders could follow suit including raise their rates. Yes, they could be lower than the new lender but not hugely different, after all why provide a actually low rate if you might provide a slightly higher rate including still bring the business in because your new lending rival absolutely cannot compete with your offering! To summarise, the UK mortgage market has seen a lot of healthy new competition including it is in everybody’s interests for those new lenders to flourish. If they fail then there is only 1 loser including that is you, the consumer.
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