In the first of a two-part series, Richard Northedge reports on how the mortgage broking business is facing a shake-up, with customers now being allowed to shun help and take execution-only loans.
Once, if homebuyers went to a mortgage broker it was an admission that they had a borrowing problem. The loan was too large, the property abnormal, their income too small or irregular. Brokers knew the specialist lenders, could pull strings, or find funds when mortgages were in short supply.
Non-problem buyers did not need to shop around. A generation ago there were only repayment or endowment mortgages and all lenders charged the same rate. Anyway, during shortages borrowers had to apply to the building society where they had already built up savings.
Then mortgages got complicated.
In came fixed rates, low-start rates, long and short terms, interest-only loans, over- or under-payment flexibility, penalties, rates reflecting deposit size and arrangement fees. Even currency loans.
Banks entered the market – then non-banks. Bamboozled borrowers increasingly turned to brokers to guide them through the maze. Yet, even after the financial crisis, fewer than half of home loans involved an intermediary.
Tightening the rules too tautly
The 2014 Mortgage Market Review changed that. Before the review, 30%-40% of loans came without advice from the lender or an intermediary. Since then, the proportion is just 3%.
The Financial Conduct Authority (FCA) admits that was the intention but, five years later, it is conceding it tightened the rules too tautly. In particular, whenever lender and borrower interact, that turns into advice.
Even if a consumer asks for a recommendation but is not given one, that is deemed to be advice. Someone trying to arrange a loan on the internet who phones to say the page has frozen can be instantly dragged into the advised category because of the interaction.
Nervous banks fear that if they point out that customers need not take advice, that itself is advice.
Regulator u-turn
To avoid such catch 22 situations, the regulator is now doing a u-turn that will encourage more customers to shun help and take execution-only loans. That will re-introduce risk for borrowers, admits the FCA, but the watchdog now seems happy to give people the choice to make their own mistakes.
The pressure to take advice was promoted by the government-backed Money Advice Service – absorbed this year into the Money and Pensions Service – whose website includes Why it’s usually a good idea to get mortgage advice and ‘Risks of not getting advice’.
Besides filling-in forms for those who find them intimidating and explaining the choices, brokers can sometimes offer loans not available directly from lenders. And if an adviser makes a bad recommendation, the customer can complain – right up to the ombudsman, if necessary.
The advise-yourself borrower forfeits those rights.
Read the second part in this series, Mortgage broking and the future
Richard Northedge is a former banking journalist of the year and was deputy City editor of The Daily Telegraph
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