Return to lender

As the mortgage market contracts remortgaging is becoming more important and brokers have a fight on their hands to stay in the game, says Bob Hunt

If further evidence was needed of the remortgage market’s growing importance, take a look at the Council of Mortgage Lenders’ January figures.

They reveal that 85,000 remortgages were completed that month, up 43% on December’s figures. This is slightly down on the 89,000 remortgages seen in January 2007, although at £11.6bn their value was up by £1.1bn compared with the same period last year.

When compared with the number of loans for house purchases, the importance of the remortgage market becomes clearer.

There were only 50,300 house purchase loans in Januarya 19% fall from 62,000 in December and 34% lower than the 75,800 loans sold in January 2007. The value of the loans also declined to £7.8bn, a 17% drop from December’s £9.4bn and 31% lower than January 2007’s £11.2bn.

It has been evident for some time that the number of first-time buyers entering the mortgage market has fallen considerably, so remortgaging is shor-ing up overall lending.

If we look at 2007, the difference between remortgage and house prices was not so sharp but this year it’s a different story. In 2007, 1.059 million remort-gages were completed compared with 1.016 million house purchases – the fifth year in a row the former have outstripped the latter.

So 2008 will be an important year for remortgaging, especially considering the economic environment and fluctuations in the Bank of England base rate seen in the past two years.

The base rate is 0.75% higher than it was in 2006 and there are widespread concerns about borrowers facing higher mortgage payments. The good news for consumers about to remortgage is that the base rate was cut recently and further reductions are expected.

The prime indicator of this is the growing popularity of tracker products over fixed rate deals. CML figures for January reveal that fixed rate mortgages only represented 57% of all loans, down 20% from 77% in June and July last year.

With remortgaging taking up such a large percentage of overall lending, it is imperative that brokers are in a position to handle the activity.

Of course, when comparing last year’s lending figures against the first few months of 2008, we have to factor in the liquidity crisis.

Today’s lending environment has changed dramatically compared with a year ago and while the changes have been most intense in the sub-prime market, the crisis has touched the whole industry.

Balance sheet lenders are at an advantage and many commentators believe the balance of power has shifted from brokers to lenders.

Others believe that in the medium to long term, lenders and distributors must work harder to build inter-dependent relationships with win-win outcomes.

The influx of new lenders seeking to exploit the richer margin business seen over the past few years has come to end.

We are now confronted by a declining number of lenders as some have been forced out of the market while others have reduced their product ranges and LTVs.

Danny Antoniou, managing director of London-based brokerage Barton Mortgages, believes lenders still active in the market are viewing the current situation as an opportunity, albeit an unusual one.

“The liquidity crisis has shifted power away from brokers to lenders,” he says.

“With money not readily available and lenders worrying about their capital adequacy requirements, they are lending less cash while having to make more profit at the same time.”

Antoniou says lenders are having to maximise the profits they make on every deal. As a result they are withdrawing products and cutting maximum LTVs to reduce the risks they are exposed to.

“When the BoE recently reduced the base rate by 0.25%, some lenders withdrew their tracker rates immediately to bring out more expensive ones,” he says.

“At the same time, those that offer cheaper fixed rate deals are charging up to 2.5% in arrangement fees.

“Most mortgage deals now involve loans of £500,000 or under and it is becoming harder to obtain competitive rates for larger loans,” adds Antoniou.

For borrowers looking to remortgage at high LTVs, it is clear that product choice has been drastically curtailed. And no mainstream product sector has seen a more drastic cut in lenders and products than the 100% LTV market.

Mform.co.uk recently revealed that only nine lenders are actively marketing such products.

Six months ago 162 100% LTV deals were available to borrowers with no deposits, but this has now fallen to 39 deals. The big question is whether we are seeing a fundamental shift in the broker-lender relationship.

The level of broker-introduced business to lenders has grown substantially over the past five years.

Many now believe over 70% of all mortgage business is placed through brokers and one would assume that lenders will not cut off their noses to spite their faces, especially since there’s no telling when funding lines will reopen.

But with lenders looking at ways to increase profitability, the answer must lie in them understanding the costs and income generated by each broker.

Antoniou says lenders have raised their game in terms of client retention and points to the increased use of competitive retention mortgages for direct customers as one area in which brokers could find it hard to compete.

“Some lenders are offering much better terms to customers direct,” he says. “Others that have been particularly well supported by the broker community over the years are also offering retention products for better terms than brokers can obtain.

“Lenders aren’t paying retention fees to brokers either. While some of them are willing to make the most of the current environment, they should not underestimate brokers’ view of such practices – what goes around comes around.”

That said, brokers have always had to fight for their share of business and the prevailing market situation is no different.

Clients looking to remortgage this year may have investigated the products they can get direct from existing lenders but many will still want to know how competitive their deals are compared with the rest of the market.

Nevertheless, such business is not going to fall into brokers’ laps.

At the recent Mortgage Business Expo Glasgow, Simon Cocker, head of business development at Dunferm-line, urged brokers to follow the example of lenders and set up a contact programme for clients.

Cocker suggests that lenders are becoming more pro-active when it comes to client contact and brokers need to match this by ensuring clients know they are there not just for current deals but for future ones too.

It is vital for brokers to take steps to secure and develop their client base for repeat business.

At this time more than ever, directly authorised firms should also look at ways they can maximise their income. Smarter thinking will be key.

In a tricky market, it’s all about making the most of your business and customer base.