For all the news, comments, column inches and water cooler conversations about the change in market conditions over the last eight weeks, an acceptance is now emerging that we will not be returning to the trading conditions we have been used to for at least the last three or more years.
While it’s not all doom and gloom, with the prime market holding up well – albeit with slightly reduced volumes, falling swap rates allowing better fixed rate pricing and the prospect of the next change in Bank Base Rate being a cut, the securitised market seems tied up until the big investment banks publish their final accounts early next year.
Some in this market are already finding small pockets of interested parties and at a conference I attended last week, the relevant lender expert consensus was that by the second half of 2008 funding would be back at an acceptable level.
Clearly these timescales will be too much for some, but resilience, upping the game in adversity and making tough business decisions are in abundance in our industry, so my view is that overall the impact will be minimised.
No substitute
So with an acceptance of this background what changes does a mortgage intermediary need to make to their business? Well, in any period of volatility there is no substitute for focusing on doing the basics right and well. Knowing your customer is like breathing to an intermediary. You don’t even notice it is happening until you start thinking about it. Then it almost becomes super apparent and you can’t force it back into the subconscious.
I would like those reading this article to now be super aware of their factfinding and think beyond the usual affordability, term in comparison to retirement date, and repayment strategy. Remember, suitability is not predicting the future, and neither should it be, however everything you know or could know must be considered in giving advice.
So, for example, you know that generally lenders’ criteria have been tightening in the last couple of months. Those that borrowed, let’s say, 12 months ago, got a great deal on what at the time were standard criteria which now look very good, and are possibly irreplaceable.
What if one of these borrowers who, let us easily assume is in an early repayment charge period, has the opportunity to relocate for a better job and would like to port their mortgage?
Does their lender now have the ability to port and lend on the same terms? Or has the level of loan-to-value been decreased and the maximum lending limit now been exceeded?
Knowing your client
Thinking about what you know about your customer. Do you routinely ask your clients how long they intend to stay in the property, and then record their answer? If not, you may find yourself with a future complaint that might be tricky to defend.
Take a similar example, but this time the borrowers arranged a two-year fixed rate deal 22 months ago, but are now worrying about payment shock and would like to refinance.
At the time of the original loan, let’s say the borrowers were a couple trading up from a flat to a house. Now they happily have one child and another on the way. Although the wage earner’s income has increased, due to the new dependants, and to a lesser extent the proliferation of affordability models over income models, the original loan is now longer deemed as affordable.
To be fair, a chat to the underwriter of the existing lender to secure affordability of a retention rate should sort them out more often than not. However, wouldn’t it have been better to ask the couple if they had plans of starting a family and talk to them about the merits of considering a longer term rate if it was their intention? Then recording a note of this discussion regardless if they took the advice or not?
Consider the future
What are the other plans and aspirations of the client and how could these affect their loan into the future? To give advice is not just about how the client views the world today but is prompting them to consider the future and look at these needs as well. Understandably this can be difficult for both you and them as they may not have been expecting to be asked such questions. However, by doing so, better advice will have been given.
As this process may be a challenging one, it is all the more important that the record of the conversation, decisions made about the future and final selection of the solution must be documented and stored in such a way that on retrieval by a third party all the important contextual elements are also present.
It’s not just ‘what do you know?’ It’s also ‘what should you know?’
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