View more on these topics

Higher levels of pre-payment hit profits

The average age of a mortgage is now just four years compared to seven five years ago. A six-month long study by the Actuarial Profession also revealed how actuarial techniques used in the insurance industry can help mortgage lenders to measure pre-payment behaviour and its impact on profitability.

The study focused on fixed-rate loans, which account for about a third of UK mortgages and which have even shorter lives. It revealed that increased levels of pre-payment occur in the second half of fixed rate loans; when house price inflation is high and housing moves are increasing; when current interest rates diverge from the fixed rate and when pre-payment penalties are set below a certain threshold. It also investigated the adverse effect on lender profitability of higher levels of pre-payment.

The report was complied with the assistance of the CML and data for analysis was provided by eight lenders, including Abbey National, Alliance & Leicester, Bank of Scotland, Barclays, Bradford & Bingley, Bristol & West, Halifax and Nationwide.

The report examines a variety of repayment methods, and suggests that charging borrowers upfront for a pre-payment option, a method that is unknown in the UK at present, may become more common.

It says: “In the UK, lenders typically adjust their funding requirement in expectation of a certain level of unsystematic pre-payment and use pre-payment charges. In recent years, consumer activism, regulatory scrutiny and competitive pressures have combined to make it difficult to eliminate pre-payment risk.”

The report also says that in future lenders are unlikely to recover the full cost of borrowers exercising their pre-payment option. As a result, understanding the drivers of pre-payment behaviour and taking steps to reduce pre-payment rates will become increasingly important to the profitability of fixed-rate mortgage lending.

Recommended

A guaranteed income from interest support

Sources close to the FSA claim lenders want borrowers to receive mortgage interest support from the government so they will be guaranteed an income from interest repayments. The comments were in response to a CML circular updating members on discussions currently being held with the Department of Work and Pensions (DWP) on guidance to Benefit […]

EMU could spark tracker mis-selling complaints

Lenders are failing to clarify what will happen to borrowers&#39 tracker mortgages should the UK join the single currency, sparking fears of another mis-selling scandal. Mel Castorina, IFA at Dulwich & Village Residential Brokers, told Mortgage Strategy: “Clients are told that they will get a percentage above base rate, but the Bank of England is […]

Don&#39t believe the doom-mongers

According to the Nationwide Building Society and the Halifax House Price Index, house prices dropped in October by 0.5%, yet only a few weeks before these two major lenders could not agree on the state of the property market. Halifax claimed that it had ground to a halt, while Nationwide quoted figures that showed a […]

CA calls for penalty transparency

Redemption penalty charging structures must be clearly explained to borrowers, the Consumers&#39 Association warned last week. Melanie Green, principal researcher at the CA, says: “Consumers should not be expected to work out how much the charge would be for themselves. There should be a clear example that is representative of what they would be charged, […]

How to use wills to protect your clients’ wishes

By Ross Jackson, senior protection marketing manager March is Free Wills Month! Free Wills Month brings together a group of well-respected charities to offer members of the public aged 55 and over the opportunity to have their simple wills written or updated free of charge by using participating solicitors in selected locations around England and Wales. Research […]

Newsletter

News and expert analysis straight to your inbox

Sign up