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Are your clients paying a loyalty penalty?

Publication date:

09 July 2021

Last updated:

09 July 2021


Liz Syms

A recent review of 4 clients of my client’s mortgages at the end of their product term revealed that 3 of them would have been worse off by staying with their existing lender.

That equates to 75% of clients who would have to pay more if they were ‘loyal’ to their existing lender. Whilst this is just a tiny snapshot, it highlights the importance of the advice process.

The purchase and re-mortgage markets are dominated by intermediated business, with most mortgages being transacted this way. For retention cases, however, the opposite is true. Many rate switches are conducted directly with the lender, which ultimately could mean your client is not achieving the best deal that they could.

Lenders often are more organised in contacting the client several months before their current deal ends. Research available to advisers on the Legal and General Mortgage Club site indicates most lenders reach out around three months before the current rate is due to expire, but some as early as six months before. The switch is easy via the lender, just select a product, add a simple signature, and it is done, with no advice.

Getting advice on the best solutions, however, does take more time. An adviser needs to complete a fact find, gather the relevant documents and research the market. A rate switch is often perceived as more effortless but without fully understanding the cost implications.

There are some scenarios where staying with the existing lender is the most appropriate. For example, suppose the client is imminently about to go on the variable rate. In that case, a rate switch can save them money even if the rate is a bit higher than an alternative market rate, simply because the switch is instant. With a re-mortgage the client may have to make higher payments on the standard variable rate while a re-mortgage is being processed.  Another example where a rate switch can be more appropriate is if the client has had a change of circumstances and would not qualify for a re-mortgage. With a rate switch, the lender has already lent the money to the client, so there is no further underwriting and changes in financial circumstances do not need to be considered.

With more lenders now offering a payment to an adviser for a rate switch, an adviser has no reason to not take advantage of the retention and re-mortgage markets, which is expected to be even more significant than the purchase market. Advisers can benefit by ensuring their clients are aware of the alternative market options that may be more cost-effective when their current rate comes to an end.

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.