Morning Line: the mortgage lending tactics that distort the market

In an increasingly difficult mortgage market it is good to see that at least one lender is doing its best to simplify things.  Other lenders would do well to take note.  Conditional lending – where the borrower is obliged to take out another product in order to get a mortgage – has long been a source of aggravation to homebuyers and their advisers and is one of many practices that the regulator should be looking at in its current review of the mortgage market.  In an ideal world it would be banned.

Mortgage lender Coventry Intermediaries has pledged not to offer linked products on any of the mortgage products in its portfolio. Many lenders offer mortgages with linked products – usually house insurance or a savings scheme.  Linking makes it difficult for the borrower to work out the true cost of a loan.  Often the linked product is much more expensive that a similar product bought on the open market.  As Coventry points out, ‘this can result in borrowers taking out products which may not be the most suitable for their needs.’

Other pledges made by Coventry along with no linked products include, no dual pricing (when a mortgage is offered at one rate to customers who apply direct to the lender for a loan, and at another rate if the customer comes via an intermediary), no cross selling and all mortgages are available to both direct customers and via intermediaries – very important if borrowers are to get the most suitable product.  Many brokers are now having to point out that the best mortgage product is not on offer through a broker and are losing business as a result.

Another practice which Coventry has abolished is offering better products to new customers to attract new business, but not making them available to existing customers. This is much resented by homebuyers and many mortgage lenders offer loss leader discounts to new customers which are not available to existing borrowers. 

The other much disliked condition attached to many loans is ‘ERC overhang’.  This is when a lender imposes a penalty for paying off a mortgage – usually when the borrower wants to move to a better deal with another lender – and the penalty extends for some time after the original concessionary deal expires.  This locks in a customer to a product which may no longer be the most suitable product available.  Coventry has no ERC overhangs on any of its products.  The regulator would do well to look at all these practices which distort the market and stand in the way of homebuyers getting  good advice and the right mortgage product.