Product transfers – the loyalty penalty of the mortgage industry

If you became self-employed, you’d use a qualified accountant. If you wanted to write a will, you’d engage a qualified solicitor. If you were unwell, you would obviously seek advice from a qualified doctor.

Using this logic, it makes sense then that when it comes to your biggest asset – your home – you should talk to a qualified mortgage adviser: when you’re on the hunt for a new mortgage deal, or want to remortgage, or sell up – but also if a change in circumstances happens that could have a direct impact on the property you own.

But all too often, people don’t, particularly when they get to the end of a fixed rate and haven’t yet considered whether their mortgage can be used to improve their financial situation.

The consequences of not being on top of your mortgage and not seeking advice means homeowners languishing on the same costly standard variable rate, or they go to a comparison site to try to find a cheaper mortgage deal which may not suit their particular and unique situation. This is known as going direct to lender, or execution only… and if it sounds scary it should. Many won’t be aware of the implications.

Staying on an SVR can cost £360 in a single month for the average home.

You don’t know what you don’t know.

On the flipside, for lenders, loyal customers are key to doing business. Customer acquisition costs money and time in what is already a highly competitive mortgage market. It seems to make sense that for these businesses, the way to keep customers is to make it as easy as possible for them to stay by automatically putting them on a product transfer once the initial deal has come to an end.

In fact, product transfers among lenders are growing, perhaps a sign that there is a consensus that this is right and proper for consumers and for businesses – a happy agreement. Product transfers are becoming ever more popular with lenders, and this month, Vida even launched a new portal to make switching even simpler.

This ecosystem, where a customer never seeks advice and is automatically given a product transfer, hasn’t been called into question before. Until now.

The fact is, if a product transfer is given to an unwitting mortgage holder – i.e. one who hasn’t sought advice even if it does still fit their circumstances, is a missed opportunity to do right by a customer. This isn’t to suggest that product transfers are inherently bad, but there has been a recent, dangerous trend of homeowners locking themselves into new mortgages with exit fees, but without the benefit of serious financial advice.

Sometimes, it’s true, a product transfer will be the right decision for a customer, but It’s fundamentally wrong for lenders to assume that a customer’s circumstances are exactly the same as when they took out an initial mortgage deal. So why not seek advice anyway to be sure?

Of course, borrowers staying with their existing lender should be cheaper. Because there is less risk for the lender when lending to people they already know to be reliable payers – no conveyancing costs, no land registry changes, rarely even a physical survey. But often the borrower or adviser is taking the product transfer out of convenience alone, which means a product transfer may be the very worst thing to offer them, even though it might mean less paperwork.

When you have the whole of the market to look at, failing to inform a customer of their options – i.e. potentially more tailored products for their circumstances – you are failing in your duty of care to that person. Keeping them tethered to a product that may now be completely wrong for them, even though this might save you money from the perspective of customer acquisition, is unethical.

Product transfers – when issued by stealth – are effectively the loyalty penalty of the mortgage world. And the consequences of this are serious. Given that a mortgage is likely the single largest financial agreement you’ll ever make, when things go wrong, you can become homeless.

But what is causing the growth in this market? Why are product transfers becoming increasingly popular when they’re so unsuitable for so many? Covid, in part, is responsible.

Those who have been furloughed during the pandemic, or who have lost their jobs through redundancy, and even those who have had their hours reduced, might have been led to believe that remortgaging would be difficult.

While this may be true, what is clear is that these people have gone through quite a drastic change in circumstances. The kind of change that demands serious, personalised advice about their mortgage. A product transfer ignores all of this, or at least carries such low-level checks so that the need to reassess the mortgage holder’s resources is effectively bypassed.

Opting for product transfers over remortgaging also ignores the fact that two people who, for example, have been furloughed, on the same wage, may have vastly different spending and borrowing habits.

Advice – not a decision tree, but human advice – must become the norm. Talking to a qualified adviser or broker gives a customer the best possible chance, by looking at the whole market to see what options work the best for them rather than sticking with a deal that may now be totally wrong.

Without advice and advisers, consumers remain completely in the dark about the other options available to them which might be far more suitable. Not necessarily cheaper each month, but certainly better value overall.

It’s simply unacceptable now not to do right by customers. The FCA is currently consulting on ways to increase consumer protection in retail markets and has proposed a new ‘Consumer Duty’ which it says would require a great deal of change in culture and behaviour on the part of firms.

If the FCA were to go further and open up the simplified affordability rules, more lenders would be able to offer deals to new customers at the same rate or less than their current deal with another lender without falling foul of the continuous employment / income rules.

Given the far-reaching ramifications of Covid, this will be a problem for many.

This isn’t the dreaded self-certification mortgage of the noughties. Rather, these rules are designed to allow borrowers to use their past performance and behaviour to act as proof of affordability. Many lenders are already using open banking data to help underwrite applications – clearly the best indicator and also fraud-proof – it feels like an inevitability that this method of proving a person’s affordability will soon become the norm and render payslips and income and expenditure forms to history.

And even though customer care is fundamentally the right thing, in the long term it can reap dividends through increased and meaningful customer loyalty. Customers who know that they are being given impartial, whole of market advice to find a deal that genuinely suits their current situation.

A better-informed customer will know to come to you when they have a change in circumstances. They will learn fast that the advice you give is of value and importance, and that they should listen.

The FCA talks a lot about responsible lending, but it is imperative for our industry to consider what can be done to encourage, promote and enable more responsible borrowing. This means more education, more choice, and not turning a blind eye to increasing profits at the cost of customer outcomes.

And certainly not cutting out expert, qualified mortgage advisers who take an enormous amount of pride in achieving the best possible outcome for their clients.

You can read this article on Mortgage Strategy here.