7 October 2015
Does our mortgage market work?
The UK mortgage market doesn't do a bad job. As a nation of people who obsess over their ability to get on and get up the housing ladder, it could be said that our mortgage industry has made dreams come true for many millions of people.
More to the point, people are generally getting decent value. Mortgage rates have been competed down to historical lows over the past few years - with deals currently available at not much than 1%.
Fuss over nothing?
With such a backdrop, there will be many in the lending industry who are left feeling exasperated after today's announcement that the Financial Conduct Authority is considering launching a full inquiry into the state of the mortgage market.
But while the overall health and conduct of the sector may look fine from a distance, there's plenty of things that drive bad outcomes for customers when you drill down a bit further.
One of my biggest bugbears with the industry has been its failure to help customers compare deals based on total cost. Instead, most lenders shout about how great their headline rates are, while adding in various compulsory fees and charges around the edges, which may mean their offers aren't nearly as good as they look for some customers.
Time to tell us the total cost
The only way to give customers some certainty that they're getting a good deal is by showing them the cost of their loan - including compulsory fees and charges - across the initial offer period, so that they compare this across different lenders.
For borrowers with smaller mortgages, it's quite possible that a loan with low headline interest rate will be more expensive than a deal with a higher rate but lower fees. And we know that customers really struggle to get their heads round this. A few years ago, Which? did some research showing that most people were unable to pick the cheapest deal from a selection of mortgage packages. The mixture of fees and interest successfully confused the participants into choosing more expensive deals. And in some cases, the wrong decision may have cost them hundreds of pounds over the lifetime of their loan.
One of the reasons that lenders get away with this is that the sums of money involved in mortgages are so large that a few extra hundred pounds here and there is easy to get lost. But lenders need to be doing much more to help customers see how much they're really paying.
The Council of Mortgage Lenders is currently working with Which? to come up with some clearer ways to disclose the fees around mortgages. From what I've heard so far, the solutions don't look like they go far enough - which could leave Which? in an awkward position if it's asked to put its name to a half-hearted piece of policy.
Too many fees
Booking fees, arrangement fees and valuation fees are the main evils - fees that can't be avoided and which are paid up front at the start of the mortgage. But there's also a problem with the sheer volume of additional fees and charges that some lenders keep in their back pocket.
Skipton Building Society, for example, has no fewer than 34 additional fees and charges - which you could be hit with after you've taken out a mortgage with them. This creates a hazard for customers - as these back end fees are rarely disclosed clearly at the outset, leaving customers trapped into paying up when they walk into them once they're signed up to the mortgage. Some lenders only charge a handful of these additional back end fees - so it's clear that lenders don't need to operate in this way. But many choose to - and it will almost certainly take regulatory intervention for them to change their ways.
The mortgage market is not broken. But many customers are obliviously walking into the wrong deal. A mis-buying scandal rather than a mis-selling one perhaps - but one that is willingly facilitated by many providers.
Last month, Fairer Finance published its mortgage ratings for the first time. What they show is there's bags of room for improvement when it comes to being clear and transparent with mortgage customers. The sector is ripe for an inquiry, and we'll be encouraging the FCA to follow its nose and press ahead.
POSTSCRIPT: As an aside, I couldn't help noticing that the FCA's paper today was entitled "Call for inputs on competition in the mortgage sector". If the FCA wants the industry to be clearer and use less jargon, it may have to work harder to lead the way. I've never heard the phrase "call for inputs" before. Hopefully, the FCA can come up with a more friendy way of expressing itself in future. How about "Is the mortgage market working. We want to hear your opinions." (You can keep that one guys).