Peter Izard is senior manager corporate accounts at GMAC-RFCF
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?