Potential Pitfalls of Product Transfers

Borrowers panicking about rising rates and choosing to Product Transfer with their current lender without consulting a broker are potentially losing out on lower interest rates from alternative lenders and paying more than they need to. I have seen clients fix a rate when they are already struggling to meet their current repayments, leaving them financially vulnerable when they switch to the higher rate. Had they been given proper advice, those clients would have been made aware of alternative options open to them such as extending the term of their mortgage to keep repayments down. Furthermore, their current mortgage may no longer meet their requirements. For example, they may wish to have flexible features such as having the option of making overpayments or porting the loan to a new property.

The fact that consumers are required to take mortgage advice at initial application but, after that, can then choose to 'self-service' their mortgage is baffling and flies in the face of the regulatory rules. Considerations such as future home moves, job changes, inheritance and expanding families are all crucial and must be taken into account when deciding on the correct product and structure for the mortgage. The Product Transfer system allows consumers to sidestep advice easily and can lead to decisions that come back to bite them in future in the form of early repayment charges.

Taking independent and impartial financial advice over the biggest financial transaction most people enter into is very important, and this is especially true when selecting a new rate from their existing lender. The general public seems to have no idea that their existing lender has no obligation to worry about if they are making the right decision when changing rates with them. When advice firms, like our own, offer to take on these like-for-like transactions without charge we just can't see why applicants wouldn't double-check by contacting a financial adviser and getting the peace of mind that they are taking the right product for their needs compared to all the other lenders and rates that are available.

The most common mistake I see when people look at mortgages and especially product transfers, is they simply look at the lowest rate on offer and take no account of how long the deal is for or the fees to set it up. This often means they either select a deal that is not appropriate for their future plans and will potentially cause them an issue down the line, such as taking a 10-year fixed rate but wanting to move house within the next 2 or 3 years, or a deal that is actually more expensive for them than it needs to be. For example, with a smaller mortgage balance, it is often better value to take a higher interest rate with lower or zero fees than it is to take the lowest interest rate and pay a £999 set-up fee. This is the downside to making a mortgage journey quick and easy: it also makes it quicker and easier to make a very costly error.

There are two main points that spring to mind. Firstly, I’d always recommend looking at what’s available elsewhere. A product transfer can be an attractive option because there’s usually no underwriting and no lengthy legal process involved. However, there could be an option elsewhere that saves a good amount of money. Second, by opting for a product transfer directly with your current lender without consulting a broker, you’d be proceeding on an execution-only rather than an advised basis. It’s good to have someone that you can discuss your current circumstances and future plans with before jumping into a new deal. There’s no real guidance otherwise. What if the new product doesn’t allow for overpayments? What if the new product is not portable to a new property? What if the new product is a variable interest rate but still has early repayment charges? Without guidance, it can become easy to get stuck with a deal that no longer suits your needs.

Less than 10 years after the Mortgage Market Review (MMR) was implemented to protect customers from themselves and raise the level of regulation in the industry, and less than two weeks away from the new Consumer Duty rules, again aimed at protecting customers, it seems crazy that customers are being pushed towards choosing their own mortgages without any sort of advice, potentially locking in for half a decade. At this time of higher base rates and inflation, no customer is entering their remortgage in the same position they were a couple of years ago. The recent mortgage charter (pushed through by the bigger banks to serve their own interests) further reduces the vital advice part of mortgage advice.

The biggest pitfall is not really knowing whether a Product Transfer with your existing lender is the most cost-effective and best-suited mortgage option for you. Consulting with a broker on the other hand means you have peace of mind that you are getting a good deal and it's one that is tailored to your needs. Choosing to say with your current lender could cost you thousands more in interest. I'd like to see mortgage lenders push their customers back to see their existing mortgage broker more.

With so much despair in the mortgage market over the past nine months, mortgage holders are more likely to make rash decisions through fear of losing a rate without fully understanding the extent of that decision. With more lenders offering a rate switch service on a non-advice basis, it could be a recipe for disaster later down the line where customers have shoehorned themselves into a product that may not fit their needs. With fewer purchase transactions being completed, lenders are hungrier than ever to keep hold of any existing customers as they can't afford to lose that client bank, which leads to more direct marketing looking for clients to fix in with them directly. However, there are still lenders out there that suggest speaking to a broker before making a decision and we need to see more lenders follow suit to avoid poor financial outcomes for customers.

Understanding product limitations is one of the biggest issues I have seen with clients selecting new mortgage deals without advice. Some clients may tie into a new mortgage deal with early repayment charges and not truly understand the effect this would have until they come to move home within the fixed-rate period. Whilst "porting" is a nice feature, it's by no means a guarantee of a future mortgage. And small errors like this could potentially cost clients thousands of pounds further down the line.

Some lenders make it very easy for customers to go direct and carry out a product switch online, sometimes with just a few clicks if the mortgage is linked to their online banking. Customers don't always weigh up the options and understand how to work out which product is more cost-effective over the fixed period, and many don't take into account any arrangement fees added and don't always notice the early redemption penalty, either. This then leaves customers in some instances needing to pay hefty early redemption penalties or paying large fees when that may not have been the best option for them. Speaking to a mortgage broker and getting impartial advice is vital to weigh up the pros and cons of not only the product length but also which lender is most suitable.

Why would you not want to seek advice when dealing with what is quite likely to be your largest-ever debt? Which almost certainly is secured against your largest asset? If I need my car looking at, I go to the person that deals with that day in, day out, I don't try to do it myself, even if I think I can. Far too often people are drawn to the headline rate and do not factor in all the areas of advice that an adviser would check with them. I've seen people really shoot themselves in the foot when going direct.