Mortgage lenders need to move to fairer and more transparent forms of charging
Saturday 12 September 1998
This rather unstartling conclusion comes from a new survey by Datamonitor, the financial researchers, of the UK's biggest lenders and their relative success in winning borrowers.
Datamonitor singles out Midland Bank, Northern Rock, Nationwide Building Society and Direct Line, the telephone-based financial subsidiary of Royal Bank of Scotland, as being among the biggest winners in 1997.
Among the "losers", relative to their existing market share, were Halifax, Abbey National, Alliance & Leicester and Woolwich, all former building societies.
Datamonitor's research points to some interesting conclusions. For instance, Nationwide's ability to outpunch its normal market share and attract massive new numbers of borrowers is hardly surprising. The society has offered cheaper mortgages than its erstwhile mutual brethren. The lesson here is that if you undercut the opposition, while gaining sympathetic news coverage for your pro-mutual stance, you will do well. Simple.
Northern Rock's success is also due to keen pricing, particularly in the fixed and discounted market. This former building society has adopted another strategy, more recently copied by the Alliance & Leicester, that of targeting punters who want to peg their rates at the lowest price for at least two or three years. The Rock's success comes at a price though. It will be paid by borrowers tied in to expensive redemption penalties if they want to offload their mortgages and move elsewhere.
It is perhaps the last two lenders named by Datamonitor - Midland and Direct Line - that are the most interesting, and by their success they offer a taste of the way forward for mortgage lending.
Midland's success is less to do with its own lending strategy, where the bank has hardly ranked among the most competitive. It owes its place at the top table to the way in which thousands of new customers have been flocking to First Direct, its telephone banking subsidiary.
At First Direct you can not only pick up a variable rate mortgage of 8.49 per cent, almost 0.5 per cent cheaper than the Halifax, but interest on the loan is calculated daily.
This means not just a saving of about pounds 25 a month on a typical pounds 60,000 mortgage. It also means that unlike the Halifax, where interest on the loan is calculated annually, every monthly (or even weekly) payment made on on a First Direct mortgage will cut the size of your loan. In effect, your mortgage can be paid months, or years in advance of the normal 25- year period, saving thousands of pounds in interest payments.
The picture is exactly the same at Direct Line in terms of daily interest calculations. Moreover, its current annual variable rate is even lower, at 8.19 per cent.
The lesson, it seems to me, is that lenders wanting to attract new business need to move to fairer and more transparent forms of charging, such as those operated by First Direct, and Direct Line.
Lenders will no doubt argue it is not possible to switch charging structures in this way. But then they claimed the same about mortgage indemnity guarantees (MIGs), which cost us up to pounds 1,500 each a year ago on top of a 95 per cent loan. We were told MIGs were essential to the smooth running of mortgage lenders' business. Today, virtually no lender charges a MIG on loans up to 90 per cent of a home's value.
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