2016 Planning


Many businesses I speak with at this time of year often complain about the length of time the business wheels take to start turning in the New Year.  It is often said that January can written off from a new business point of view.  Sadly, in the financial services world a lot can depend on the weather; if it is too hot, or too cold, consumers are often driven to other thoughts and other products.  This time of year is an ideal time, therefore, to consider plans for the forthcoming year.  Many businesses focus, in such planning, on new customers.  Such a stance often leaves me uneasy.  Surely, a key element of ‘treating customers fairly’ is the ongoing care and review of existing clients.  Existing customers are just as important as new customers.  In respect of existing mortgage customers, there are two issues that need a close focus in 2016.

Whatever, your view the bottom line is that over 1.7 million borrowers have an interest only mortgage with no repayment vehicle. 

Increasing mortgage rates
Although there are significant differences of opinion amongst pundits as to when the next Bank of England base rate change will happen there is little debate as to which direction rates will travel in, upwards!  At the end of last year USA rates increased for the first time in nearly a decade, from a nil percent rate which had lasted nearly seven years.  That change had been ‘telegraphed’ for some time and surprised no one.  However, what did raise eyebrows was the speed with which some banks increased their own prime lending rates, within hours by some banks!  Will the same happen here when the Bank of England implement their increase (the first increase since July 2007) from the historic low set in March 2009 of 0.50%?  Of course!  Pundits expect that existing fixed rates will be pulled with days, if not hours, of the change.  Around 56% of mortgage customers pay their mortgage based on a standard variable rate (SVR) or a tracker rate, so will, in theory, be ‘at risk’ customers.  The question is, 1) do mortgage brokers know which of their existing customers fall into that category and 2) how would those customers cope with an increasing interest rate environment (which many borrowers will not have experienced before).  The action point for mortgage brokers is simple, customers at risk of ‘payment shock’ simply have to be identified and contacted.  After all, affordability would have been understood when the mortgage was arranged so little effort should be required to predict the future position.

Interest only mortgages
I know a lot has been said, and written, about the so called interest only ticking ‘time bomb’.  Whatever, your view the bottom line is that over 1.7 million borrowers have an interest only mortgage with no repayment vehicle.  A large percentage of those borrowers will be coming up to the half way point of their mortgage and nothing will have changed since they took out the loan.  Mortgage brokers understand better than most the variety of repayment plans that were shown on mortgage application forms and they also know which lenders turned a blind eye to implausible plans.   The hope at the time might have been that house price inflation would cure any flawed plans, but that effect has not really materialised in the last decade and the question is will house price inflation return in the second half of customers’ mortgage terms providing the required ‘get out of jail card’?  The bottom line is that borrowers and their advisers should not rely on it.  Even if only minor adjustments can be made, those adjustments will help to reduce the risk of reaching the end of the mortgage term with the same size loan and same amount of equity, with no means of paying off or reducing any of the loan.

There is no doubt that 2016 could be a challenging year for existing borrowers.  There is no better time for mortgage brokers to reconnect with their existing customers offering them professional guidance to help them through the year.


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Partner - Baxters Business Consultants - a business consultancy undertaking marketing, training, freelance journalism and expert witness services to the residential mortgage lending, building society and financial service industry (April 1993 to date) - www.baxtersbc.co.uk.

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