Free legals and valuations can present an attractive cost saving to borrowers but are they a good thing?
Paul Broadhead, head of mortgage policy, Building Societies Association
People bring a lot of baggage when buying a property. Just check out the consumer research that accompanied the FCA’s recent thematic review on advice and distribution.
The list of buyer issues the regulator found included being overly optimistic, failing to engage with the advice process and having a fixed attitude about what they viewed as the best mortgage.
You can understand the logic behind this. No one actually wants a mortgage. What they really want is the property they have set their hearts on as cheaply as they can get it.
At a time when every penny counts, free legals and valuations can present an attractive cost saving to borrowers. However, it is worth finding out from your clients whether the upside of the cost saving outweighs any potential downsides from the limits on what is provided. Circumstances will obviously dictate here, especially for remortgages.
On the legals front, conveyancers make the case that the advice is aimed at the lender rather than the customer, which becomes even more pertinent if something goes wrong.
Likewise, the Royal Institution of Chartered Surveyors has carried out research showing that, on average, homebuyers spend £5,750 on repairs once they have moved into their home. This, it says, is often the result of not getting a detailed survey.
Confusion about the precise difference between a valuation and a survey is at the heart of the matter. To that end, the RICS has put together a short video called ‘The importance of getting a survey’, which you can find on YouTube. While it will not be competing for hits with the latest must-see cat video anytime soon, it does neatly spell out the potential financial risks of not getting a proper survey.
In her 2013 report for the RICS on improving the sector, one of Dr Oonagh McDonald’s 12 recommendations was that lenders should pay for the valuation report as a means of making it clearer for whom it is intended. The thinking was that it would lead the borrower to realise they should carry out their own survey in addition to the obligatory valuation.
The RICS is thinking of going one stage further by stripping out the valuation element from the Homebuyers report to further hammer home the message.
Whether these changes will have any effect remains to be seen. But as intermediaries looking after the needs of your clients, you clearly have a role to play in educating them about how best to protect themselves.
Buying a house is an emotional time, which makes it even more important that your clients understand all the options available to them, from both a survey and legal point of view.
Robert Sinclair, chief executive, Association of Mortgage Intermediaries
They say there is no such thing as a free lunch and I believe offers of free legals and valuations fall into the same pot.
As firms of all types compete to win business, the price to the consumer is often used as the competitive lever. With this in mind, as an industry we are devaluing the professional skills and services we provide.
The importance of the valuation, even if just for mortgage purposes, is fundamental to the loan-to-value calculation and therefore to the pay rate of the loan. This requires professional skill, knowledge and judgement, which should be appreciated by all in the chain. Selling this as a freebie does our sector no good.
Similarly, the legal work should not be clouded by marketing a free service to consumers that diminishes its importance.
Where this is applied, there should be clarity about whom the solicitor or conveyancer is working for. Consumers may have an expectation that it is operating for their protection when, in fact, the free service comes from the agent of the lender.
This cannot be satisfactory when dealing with the largest asset most people ever own. Customers need an adequate explanation of the legal documents they are asked to complete, as well as the lender’s terms and conditions, and the limitations and restrictions that may form part of the mortgage agreement.
Anecdotally, my members tell me that borrowers who accept the ‘free’ offers end up at the back of the queue or with the less-skilled firms. This is my main concern.
We are all working hard to restore a tarnished reputation and this does not help.
Surely we should all accept that these offers are factored into the price of the loan somewhere and such gimmicks provide no benefit in the longer term.