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Does halifax offering a proc fee for retention spell death for the remortgage market?

Peter Izard is senior manager corporate accounts at GMAC-RFCF

For lenders, keeping clients is much more cost-effective than attracting new ones. So will this move kill off the remortgage market – the broker’s bread and butter? No.

Let us first consider why clients remortgage in the first place. Of course, some remortgage for a reduced rate on their existing loan amount and term. But many remortgage to raise capital for home improvements, for debt consolidation or for a variety of other reasons.

In these circumstances the broker must ask themselves if the best interests of their client will be served by staying with their existing lender and if they will be able to borrow the amount required.

Another reason clients wish to remortgage is because their personal circumstances have changed. They may have suffered redundancy or a reduction in income meaning their credit profile has changed. They might even have missed some mortgage payments.

Under Treating Customers Fairly, brokers have to ensure they have thoroughly reviewed the market to demonstrate that the retention product offered is the best for the client’s requirements. If it is, it is only right that the broker is rewarded for their work.

Halifax offering a proc fee for retention business will only enhance competition among lenders in the remortgage arena as they will still wish to attract remortgage business. This will mean an upsurge in competitive rates and more packages being made available. And the number of new entrants in the lending market combined with existing players will ensure that competition grows, leaving clients with even more choice.

All things considered, the remortgage market will continue to flourish and retention initiatives will have a small effect on this element of the market.

Alan Cleary is managing director at edeus
The thrust of retention strategies is fairly obvious – they are designed to kill off the remortgage market and extend the life of loans.

It’s scary how easy it is to lead intelligent people up the garden path when you flash a bit of cash. I advise all brokers to look at the likely longer term impact of moves such as Halifax’s retention fee initiative rather than the quick fix they seem to provide.

The top five lenders have hundreds of billions of pounds on their back books. Some are charging standard variable rates at 2% above base. The cost of equalising back books and new business would be astronomical.

It is cheaper to pay brokers to kill the remortgage market than it is to equalise back book pricing with new business pricing.

Retention is a strategic issue and the logic is surprisingly simple – lenders in the prime sector cannot make money given the dynamics of today’s prime business. A typical prime deal at 0.25% above the base rate will have a life of 2.6 years. Therefore, the lender will make 0.25% x 2.5, which equals 0.625%.

After paying the intermediary 0.35%, the cost of processing at 0.15% and the cost of servicing at around 0.25% plus any other associated costs you can see that there is no money in it. On the face of it the lender has relatively few options – put up prices, cut costs or extend the life of loans.

Of course, when lenders’ tactics have worked and they have killed off the remortgage market, normal supply and demand dynamics will resume. The average life of a loan will have improved, lenders will be making plenty of profits and there will be little demand for remortgages. So the next obvious question lenders will ask themselves is – do we need to pay this much to intermediaries?

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