Fee is the magic number

Grant Bather

June 17, 2006

The market continues to develop and evolve at pace. As a result of increased competition and against a backdrop of narrowing profit margins, we have witnessed arrangement fees almost doubling over the past few years and being used more strategically by lenders. But, as we watch the market develop, there are some issues that need to be addressed. What factors have caused the increase in arrangement fees? How have the increases impacted on the consumer and lender? What strategies are the mortgage lenders employing to remain competitive?

As a result of these rapidly increasing fees, the market’s lenders need to continue to be both competitive and creative in their product development. Lenders therefore now use innovative ways to price their products to obtain maximum exposure on the sourcing systems. By trimming say, 0.15 per cent off the headline rate and adding this to the arrangement fee, the product remains as equally profitable for the lender who can also steal competitive advantage in those very important best-buy tables.

This rapidly increasing competition has meant tighter margins on products, particularly those relating to the buy-to-let market. Product innovation is one way lenders can continue to move with the times and the strategic use of fees is something that is heavily relied upon in order to remain competitive and yet profitable. Arrangement fees vary across the entire product spectrum and are currently at their lowest level on prime mortgage products and tend to be more expensive in both buy-to-let and non-conforming mortgage lending.

All pockets and lifestyles

In today’s non-conforming market arrangement fees range from no charge to £4,500, with an average of approx £700. In the non-conforming market, the use of arrangement fees is strongly influenced by the customer profile, as the fee is often added to the loan amount with no upfront payment, therefore suiting the customer’s needs. The standard mortgage products have lower fees, with most fees ranging from 0 to £1,500 and an average of approx £500. The Cheshire’s fees across the entire product range currently range from £395-£545, with some products having no arrangements fees at all. The key factor here is choice and lenders have designed products to suit all pockets and lifestyles. For example, most lenders offer borrowers the option to add the arrangement fee to the loan to spread the cost.

Another development is that booking fees are often being used as an upfront and non-returnable fee. This naturally protects the lender as if a consumer cancels during the process and has not paid a fee, the lender is often left covering the administration costs. This booking fee is being used today as a tool to reduce the amount of time spent on applications that will never be completed. Evidence shows over the last three years there has been a considerable reduction in the fall off rate, as any booking fee encourages consumers to a certain level of commitment and therefore reduces the likelihood of borrowers backing out half way through the application process. Given this scenario one can only wonder what impact Home Information Packs (HIPs) are likely to have on the property market from June 2007.

A combination of lower interest rates, improved retention strategy, together with generally higher arrangement fees on remortgage business are also going to result in a slowdown of the remortgage market.

Complete transparency

Increased charges will always come under scrutiny, as evidenced by the Financial Services Authority’s (FSA) earlier comments regarding administration fees and redemption overhangs, but providing complete transparency remains in both product development and design, then consumer choice is still the winner as lenders strive for innovative offerings for the market.

As these fees develop, the industry must remember that consumers are becoming far more savvy and can monitor products more thoroughly without being swayed simply by the interest rate or arrangement fee. As a nation, we are obsessed with the value of our homes and the property market continues to provide investment opportunities that many of our other regular investment options have failed to match in recent years. Pensions and the stock market spring immediately to mind. However property investment continues to offer a good return.

The competitive market coupled with the rising costs of mortgage regulation has clearly affected the bottom line and will certainly have played a role in these increasing fees. Profit is certainly not a dirty word for any lender and all should be looking to price sensibly for the future of the business – whether this be to satisfy shareholders or members. Some analysts have indicated that fees should now be less for lenders, due to better technology, online capabilities, and an easier process. Although this is a fair argument, the improved technology has simply helped us to offer greater choice, which has to come at a cost, to suit all pockets. The Cheshire, for instance, has never had a bigger suite of products on offer and without the technology we would probably have to increase prices or reduce choice while importantly balancing our operating margins.

Here to stay?

The UK market is arguably the most competitive in the world, with over 100 mortgage lenders vying for business. However, this competition will be hugely beneficial to the consumer who now has a plethora of choice and can scour the market for the best rates.

Overall, arrangement fees are here to stay and they will inevitably continue to play a key role in lenders’ strategies in the purchase and remortgage markets. Lenders need to remain competitive and profitable, and will remain committed to developing their product range and services. As some fees have already reached £4,500, it will be interesting to see whether a ceiling will ever be reached but whatever the future holds it remains very bright for the consumer.

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