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Switching success

Against a backdrop of last-minute rate pulls, lengthening pipelines and increasing regulatory burdens, it is refreshing to report some good news for the mortgage sector: the number of borrowers on typically higher ‘reversionary’ rates has fallen substantially since 2016. The data comes from a recent update released by the FCA, who have been monitoring various sectors within financial services for signs of ‘loyalty penalties’ being imposed on consumers.

74% of residential mortgage borrowers are now protected from rate rises for at least the next two years, with 37% on fixes for two years plus. The remaining borrowers are divided roughly 50-50 between those on trackers or discounted variable rates and those on reversionary rates (usually in line with the lender’s SVR) following the expiry of an initial fixed-rate term.

Although the regulator stops short of saying the number of borrowers on variable rates has halved since 2016 (the statistics are not comparable due to different data collection methodologies), it is true the number of residential mortgage borrowers on variable rates for six months or more has gone from 2 million to 1 million, out of a total of 8 million to 8.5 million borrowers in 2016 and 2021 respectively.

A complex picture sits behind the data

Of course, a variable rate can be the most appropriate option for a consumer, with some preferring to remain on a reversionary rate or other form of variable mortgage for the flexibility, or because the mortgage term is very short and little benefit could be gleaned from switching.

The FCA acknowledges this, highlighting that although average savings of £1,240 per annum could be made for 370,000 consumers in a position to switch, only around 260,000 would save more than £500 per annum over two years by moving to a fixed-rate deal, with that number reducing to 150,000 for those with the potential to save £1,000+. Another part of the story is the plight of ‘mortgage prisoners’: those who are desperate to switch but for whom refinancing is not currently an option. Taking all of this into account, the regulator is satisfied the market is functioning well, and that ‘the case for further regulatory intervention is not currently justified.’

Highlighting the role of brokers

Curiously, the FCA research summary overlooks the role brokers will have played in bringing about this change. In 2020, mortgages transacted via brokers reached ‘exceptional levels’, rising to more than 80% of the market, according to trade body IMLA.

Although IMLA notes these levels are unlikely to persist in the post-Covid landscape as direct-to-consumer (D2C) lenders look to reclaim some of their lost market share, the fact remains that increased intermediary dominance in the market has coincided with a drive towards significantly better long-term outcomes for mortgage borrowers. This is especially pertinent given the inflationary pressures that have recently thrown over a decade of entrenched monetary policy into reverse, with the Bank of England now looking to edge rates back up towards historical averages.

More work to do

The FCA still plans to monitor switching trends in the mortgage market, and has called on lenders to ‘consider what more they can do to encourage mortgage borrowers to think about switching to a less costly option where that is available’. This is in addition to a list of expectations set out in its recent Dear CEO letter to mortgage lenders, ahead of the prospect of a worsening cost of living crisis in Q4 as energy costs rise even further.

Intermediaries are also expected to keep supporting borrowers to get the best deal. Analysis from Accord Mortgages found that almost £100 billion worth of fixed-rate mortgage deals will come to an end before the new year. Consumers have become more proactive about contacting advisers well in advance of fixed-rate deals expiring due to anxiety over rising rates, so it’s likely that many of these borrowers will already have something lined up (this is a big part of why pipelines have been getting so much longer, as future demand is being brought forward). But this nonetheless presents a massive remortgage and product transfer opportunity for intermediaries.

Brokers may also wish to review their lead times for contacting clients to discuss a remortgage, as the combined impact of rising energy costs, general inflation and rising interest rates might drive some borrowers to take action sooner than is necessary or even advisable. In an economically stressful environment, borrowers stand to benefit more than ever from the expertise of a mortgage broker – not only to secure the best deal, but to help them avoid rushing into decisions they later come to regret.

The value of advice

This update should serve as a reminder that strong intermediary involvement in the mortgage market has the potential to keep the market competitive, drive down costs and ultimately produce better long-term outcomes for consumers. Broker-client relationships often form a virtuous circle – there is a natural incentive to recontact clients to review their options at the expiry of a fixed-rate deal, and customer satisfaction is a key factor in determining repeat business levels.

Previous FCA research into ‘non-switchers’ also found that customer loyalty and reluctance to move away from trusted providers was a key explanatory factor for consumer inertia. Brokers can offer a ‘best of both worlds’ solution to this tendency: the sense of trust and confidence that comes from a long-term client relationship – which consumers appear to value highly in the world of financial services – plus the financial benefits of brand disloyalty when fixed-rate deals come to an end.

Fixing what isn’t broken – regulators must remain alert to unintended consequences

On a related note, the FCA would do well to keep an eye on the factors that drive lenders to pursue D2C routes to market – especially where increased regulatory burdens risk accelerating these trends. The new Consumer Duty and Appointed Representatives regime review each pose enormous cost and operational challenges for mortgage brokers and lenders alike, despite this being an already well-functioning area of the financial services landscape.

Around half of new residential mortgage business involves first-time buyers, and mortgage brokers are often a consumer’s first encounter with a professional financial adviser. Some consumers may fare well without expert guidance, but many fare better with a broker in their corner. A good broker draws upon years of industry experience and training to determine the best deal for the client, helping them to see past the headline rate and understand the full spectrum of benefits and risks associated with each option. None of that can be replaced by a Google search.

We will continue to research and promote the value added by mortgage intermediaries, and – just as importantly – call on regulators not to overlook the vital role intermediaries play.

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