The practice of bundling mortgages whereby lenders offer preferential mortgage rates alongside other banking products is not new. It seems that whenever banks send out monthly statements they also see fit to deluge customers with leaflets offering added extras, benefits and discounted products.
The same is now true of any lender’s homepage which touts all the financial products the institution has to offer. But the specific policy of linking mortgages with other products – particularly current accounts – is a growing trend.
Since the start of the year an increasing number of high street lenders have been offering deals that are little more than bait to lure business across more than one product. The mortgage may be the hook but once caught all banks have to do is reel in customers and flog them every financial product under the sun, from current accounts to insurance deals.
Although brokers can access some of these mortgage rates through lenders such as Woolwich and Halifax there is a worry that the trend among lenders to approach customers directly with linked rates poses a significant threat to brokers’ client banks.
Clients are lured away by the promise of better rates that brokers may not be able to access, and all they have to do to access these rates is open a bank account with the lender in question. From the client’s point of view they believe they’re getting a better deal while the broker is locked out, unable to compete.
And it’s not just better rates that lenders are offering in exchange for customer loyalty. Last month Yorkshire Building Society launched a first-time buyer range with a 90% LTV deal that only members of the society can access. The five-year fixed rate deal is available at 6.49% with free valuation and legals. To qualify borrowers have to either been a member of the Yorkshire for more than 12 months or have a close relative or friend who has been with the society for more than a year.
The mutual has also introduced an account to help first-time buyers save for deposits. This pays an interest rate of 2.05% gross per year including a bonus payable when customers are issued with full mortgage offers. If savers go on to take out a mortgage with the Yorkshire they receive £100 cashback.
HSBC offers discounts of between 0.15% and 0.2% off its standard mortgage rates to its Plus and Premier customers and has done so for the past four years. It also reserves exclusive mortgage rates for these clients.
“This practice of offering enhanced rates to customers with premium accounts doesn’t stop at mortgages,” says an HSBC spokesman. “They are offered across savings and other product types too and we have no plans to change this. An enhanced offering to customers on premium accounts is part of our strategy to attract more affluent customers with complicated banking needs.”
Other big lenders are pursuing this strategy too. The Royal Bank of Scotland offers rates discounted by between 0.05% and 0.1% for customers who hold packaged accounts such as NatWest Advantage Gold or RBS Royalties Gold.
And Santander offers free valuations and cashback on certain mortgages for customers who have bank accounts with Alliance & Leicester and the recently rebranded Abbey business. It also applies exclusives the other way round with its Zero current account. This account promises no fees when customers exceed their overdrafts but is only available for those with Santander mortgages.
Nationwide Building Society is also at it. The mutual offers 90% LTV deals exclusively to customers using its FlexAccount as their main account as part of a campaign to offer clients benefits across mortgages, credit cards, personal loans and car insurance.
“We are rewarding our current account customers with our ’Flex gives you more’ campaign,” says a Nationwide spokesman. “This is part of our aim of creating a lasting relationship with customers who are prepared to commit to us.”
Robert Sinclair, director at the Association of Mortgage Intermediaries, says he expects the trend towards bundled mortgages to continue.
“More lenders are going to follow suit, particularly linking current accounts with mortgages as this could help them evidence affordability,” says Sinclair. “But making one a condition of the other is not something I like to see. Giving consumers a choice seems a better option.”
The practice of making one financial product conditional on another is something the European Commission has taken issue with. The EC published a consultation paper in January on ’Tying and other potentially unfair commercial practices in the retail financial service sector’, following its report published last November (see box, opposite).
The study examined the practice of tying, whereby two or more products are sold in a package and at least one is not sold separately, across all 27 member states of the European Union. It also examined cross-selling practices including mixed bundling, whereby two or more products are sold together.
The consultation document mentions “cases of tying practices that are anti-competitive as well as harmful to consumers and small to medium-sized enterprises because they reduce customer mobility, price transparency and the comparability of providers, increase switching costs and negatively affect consumer confidence”.
It also argues that mixed bundling whereby two or more products are sold together often backs consumers into a corner as they feel they have to trust the advice being given and it is costly to shop around for alternatives.
“This piece of work by the EC is a response to the fact that in the rest of Europe most products are sold on a connected basis,” says Sinclair. “The EU’s concern is that most of these deals offer poor value and customers don’t understand the true costs.”
But Kevin Friend, strategic partnerships director at Mortgages.co.uk, questions whether the practice of bundling mortgages is anti-competitive.
“If the right advice is given nobody’s forced to sign on the dotted line,” he says. “It’s fair for lenders to say – if you want your mortgage with us, we want your bank account.”
Yet Friend also warns that with the emphasis on cross-selling there is the danger of returning to the days when buildings and contents insurance was seen as a mandatory add-on to a mortgage rather than an optional extra.
“When buildings and contents was an integral part of the mortgage deal the rate was subsidised by the fact that clients weren’t necessarily getting the best deals on cover,” he says. “That’s probably what’s concerning the regulators. Nowadays you can pick up the phone, talk to your bank and be offered two or three other products at a competitive rate.”
In its November report the EC acknowledged that there are benefits as well as pitfalls for consumers taking out additional products from their banks. It cites Competition In UK Banking – The Cruickshank Report, which was published in 2000 by Don Cruickshank as part of a banking review announced by then chancellor Gordon Brown. This found that consumers often select additional financial products from a bank they already have a relationship with. The report also identifies a consumer trade-off between convenience and value for money.
Interestingly, the EC highlights the UK as one member state where “potentially unfair commercial practices are addressed only indirectly”, despite having incorporated EU laws on unfair commercial practices into national law. In particular, it earmarks current accounts and mortgages as typical gateway products that lead to the sale of other financial services deals.
“On the face of it, bundled mortgages are fine but you have to unbundle them and look at the components to see if these are good deals,” says Mike Fitzgerald, sales director at Emba Group.
This is where IFAs come into their own. By offering clients financial reviews advisers can identify which have been sold bundled products and whether they represent best value.
“The immediate threat is to mortgage brokers and there are still too many brokers for the business that’s available,” says Friend. “The winners will be financial advisers because a lot of these products need to be understood. Mortgage brokers should be making their offerings more rounded, possibly by teaming up with IFAs. Then they don’t have to lose clients and could instead become more specific rather than just sitting on the conveyor belt of mortgages and adding on a bit of protection.”
But this theory only works if you assume that brokers are given the chance to have their say. David Black, banking specialist at Defaqto, points out that there’s nothing stopping lenders that have an existing relationship with brokers’ clients mailing them directly to attract mortgage business.
“It depends on the broker, how well they know their customers and how proactive they are,” says Black. “Maybe if clients trust their brokers implicitly they will ask if the deal their bank is offering is any good. Then brokers will have their chance. So there are opportunities but the trouble is that brokers may not get them.”
Another way for brokers to stem the rising tide of bundling is to work with the lenders offering these deals rather than against them. For example, Halifax has been running a pilot scheme offering bundled deals through brokers since February.
“Current account customers can get preferential rates through the rewards scheme available in Halifax branches,” says Ian Wilson senior manager at Halifax Intermediaries. “Deals that link current accounts and mortgages have been better accepted in the direct channel.
“That said, we’re running a pilot in the broker channel to test the appetite of brokers for a similar proposition. This is the second pilot of its kind but we must get to grips with their feedback and ensure we get it right before launching a deal.”
So would regulating bundled mortgages restore balance? Probably not. Given the Financial Services Authority’s record brokers know that further regulation is likely to end up exacerbating any problems rather than solving them.
“We must be careful we don’t create contracts that disadvantage consumers,” says Sinclair.
But at the same time he is keen to see the practice of bundled mortgages monitored.
“We should tread carefully or we may find two years down the line that this practice is a bad idea and have to start unwinding all these deals,” he says.
Friend agrees and says the EC must not place obstacles in the way of those that want to lend.
“More EC regulation could stifle competition,” he says.
The way forward for brokers may be to flag this up to clients at their next review and market themselves as consumer champions to ensure clients get the best rates across all their financial products.
Fitzgerald argues that it doesn’t necessarily make financial sense to have all your products provided by one institution.
“I’d never have my business account with the same bank I have my domestic mortgage, savings account and current account with because if you get into debt and business is bad the bank holds all the aces,” he says. “I like my eggs in different baskets.
“As long as clients are getting top independent advice they don’t have to be owned by anybody lock, stock and barrel. That’s reason enough to keep things separate.”
But as the findings from the EC show, for some clients the convenience of having all their financial products in one place outweighs the need to be on the lowest mortgage rate.
It is brokers’ job to maintain a dialogue with their clients and ensure their products are the most suitable for them, regardless of whether the mortgage rate comes as part of a deal.
But it’s clear that as lenders push bundled mortgages brokers will have to up their game. They must expand their expertise about other products to prove their mettle against high street lenders that would dearly love to rob them of their business.
These complicated products could play into astute brokers’ hands
Phil Whitehouse, Head, The Mortgage Alliance
Lenders have been offering better rates, products and terms to existing customers for some time. Consumers are generally loath to go through the hassle of changing their standing orders and direct debits so they tend to stick with their existing bank or building society. This means lenders can build up a wealth of information about their clients and initiate tailor-made marketing campaigns.
This information allows lenders to go fishing for increased take-up of their products with schemes such as bundled or packaged products. Traditionally, these products are regarded as being easier to manage if sold directly by lenders’ sales teams and more challenging if they are distributed through the broker market. So either brokers are unable to access certain rates if bundled products are not cross-sold or lenders have to make deals so good that brokers cannot refuse to offer those deals to clients.
There is an argument that if brokers do not offer the option of such deals they may be perceived as not providing best advice which could result in clients going direct anyway.
Brokers must boost their knowledge of numerous financial products just to get at the mortgages
But all is not lost for brokers in the world of bundled products and they can turn the trend around and make it a selling point. They can still advertise the ability to shop around and take into consideration all deals within bundled products by costing the features and benefits if they were bought separately.
So in some ways the extra complication of product choice could play into the hands of astute brokers who grasp the opportunity to unravel seemingly impenetrable deals. But they will have to increase their knowledge of numerous products and services such as savings, current accounts and credit cards just to get at the mortgage.
If bundled mortgages are used by lenders to create more sales and products for everyone including brokers, great. They could be the best route for some borrowers because without being forced to consider bundled products they may not benefit from certain deals. But if bundling turns out to be just another way to give better products to branches it’s fair to say that brokers would be right to be concerned.
A balanced assessment of deals
Richard Morea, Technical manager, London & County
Remember the days when lenders offered mortgage deals with compulsory buildings and contents insurance, then got slammed for it? That poor image prevails with bundled mortgages but we should look beyond the packaging because the devil is in the detail.
Innovation brings choice and for borrowers that is a good thing. A lender offering lower rates or a higher LTV in return for a bundle of products means more choice. But our experience is that borrowers want a balanced assessment of bundled deals and nobody is better placed to provide that than brokers.
Provided the process is simple and there is a tangible benefit involved most borrowers are happy to consider bundled products. Leeds Building Society offers a number of deals whereby the rate is discounted if the society’s buildings and contents insurance is taken out. So the competitiveness of the rate is balanced out for the lender by the sale of another product.
Whether this offers best value depends on the borrower but rates can certainly be competitive. As long as borrowers can see any negative effects the lender’s buildings and contents deal might have on their costs they can make an informed choice.
It’s the same where a mortgage is bundled with another product such as a bank account. This has become common since the downturn began.
The mortgage market has changed and it’s now lenders that drive product design
Lenders such as Santander, Nationwide Building Society and Halifax now offer preferential deals to applicants who take out current accounts. In return for a lower rate or higher LTV a current account may have to be salary-funded but with lenders streamlining their processes this requires little effort from borrowers.
Lenders such as Barclays have approached the desire to cross-sell from the position of already holding clients’ bank accounts, offering pre-agreed mortgages or preferential rates.
Others such as NatWest and HSBC offer existing customers enhanced rates if clients already hold or upgrade to a bundled bank account which offers them extra benefits in return for an annual fee.
The mortgage market has changed dramatically in recent years and it’s now lenders that drive product design. We don’t want to see this type of product dominating the market but bundled deals have their place and the broker community should work with lenders when it comes to such innovations.
By taking this attitude we can reinforce the advantages of the broker distribution channel and reduce the likelihood of dual pricing negatively affecting intermediaries. In short, a bundled deal could be the right deal as long as the client involved is aware of the alternatives and the sum of the parts works for them.”
Tell the ec what you think of its investigation into tying and other practices
The European Commission’s recent study ’Tying and other potentially unfair commercial practices in the retail financial services sector’ examined the practice of tying – whereby two or more products are sold together in a package and at least one of the products is not sold separately – across all 27 member states of the European Union.
The EC has now released a consultation paper to garner industry opinion on the findings of this study. Below is an extract from this paper and stakeholders are invited to respond to the following questions by April 14:
- Do you agree with the study’s findings and conclusions, in particular regarding the identified potential impact of tying and other identified potentially unfair practices on different stakeholder groups?
- What other comments or suggestions would you have, including possible evidence supporting or rebutting the findings of the study? Where possible, please provide concrete examples or quantitative information.
- How would it be possible to ensure that market participants do not suffer from the negative effects of these practices?
- Are you aware of complaints from stakeholders – in particular consumers – regarding tying and other identified potentially unfair practices?
- Do you believe that, based on the findings of the study, the EC needs to address the issue of tying and other identified potentially unfair
practices? If your answer is yes, what are your views on the form such a policy response should take?
- If you consider that a legislative solution at EU level is necessary, do you believe that the issues involved should be dealt with by sector-specific legislation or by horizontal legislation – for example, in the context of a review of the Unfair Commercial Practices Directive?
- In light of the study’s finding that in EU member states where tying is officially banned bundling tends to replace it with practically the same effect, what solution would you suggest?