In the past few weeks the financial services market has begun to resemble a battlefield, with mortgage lenders fighting tooth and nail for customer loyalty.
Nationwide fired the first shot when it reduced its standard variable rate to 6.49 per cent on February 19. The next day Halifax responded by unveiling a new rate of 6.75 per cent. Last week, Abbey National announced two new packages – a flexible rate of 6.75 per cent and a fixed rate option at 6.65 per cent.
Cheltenham & Gloucester followed late last week, announcing new variable rates of 6.60 per cent for annual interest and 6.75 per cent for daily interest. Britannia will next week make changes to its home loan product range, while Bristol & West and Alliance & Leicester both say their mortgages are under review.
The reason behind these moves is increased competition between lenders. Demand for mortgages is high and shows no sign of abating. The Council of Mortgage Lenders reports that &£40bn of new mortgages were arranged in 2000. By 2003 this is set to rise to &£45bn. The amount of re-mortgaging – people switching mortgages – is also set to rise from &£33bn in 2000 to &£40bn in 2003.
The pressure is now on lenders to ensure that the mortgages they provide offer value for money throughout the life of the mortgage in order to attract new customers and, more importantly, keep them.
In the past, lenders have tried to attract business by undercutting each other and offering new customers loss-making interest rates.
But industry insiders say this strategy, which is subsidised by charging existing customers higher rates, is no longer sustainable.
Siobhan Hotten, communications manager for independent mortgage and financial advisers Charcol, says: “UK mortgage holders have become savvy and realised the value of re-mortgaging. Lenders have started to lose a lot of back-end business and that’s not good business sense.”
While cheap headline rates are set to continue, any reductions in back-book rates will now be subsidised by savers.
“Lenders are trying to make their existing customers feel wanted, and will cut interest rates on savings to make this happen,” Hutton says.
The impending changes at the Britannia reflect the changing market. Its fixed-rate mortgage offers 5.69 per cent over 15 years, but then rises to 7.5 per cent. It is this higher rate which will be reduced in order to build customer loyalty.
Britannia sales and marketing director Gerald Gregory says: “The market is very competitive. It’s a matter of ensuring your price encourages loyalty.”
Cheltenham & Gloucester has reduced its rates for the same reason. Peter Mounty, C&G’s head of communications, says: “Standard variable rates are going down and if we hadn’t moved ours, our customers would have said, ‘Why not?'”
Halifax, says its decision to switch to a lower rate was a strategic move. “In our view it was what was needed to ensure we gain new customers and retain the old ones,” says spokesman Ian Beggs.
“What we have seen over the past few years is a very competitive market in re-mortgaging. Halifax customers have been targeted [by rivals] and we want them back.”
Tom Harvey, head of external affairs at Nationwide, says the company is now refusing to subsidise new customers. “If people want to pay lower interest rates initially, we will strike a deal with them, but they will eventually have to pay the money [they save] back.”
Abbey National is trying to attract customers by offering flexibility and tie-ins. New mortgage customers are given discounts by Pickfords Removals and npower. Abbey National head of mortgage development Mark Robinson says it is fighting the battle on several fronts. “We’re looking at attracting new customers. Customers’ needs change over time and we have got product flexibility. What we want to do is say, ‘There is no reason why you should have to look elsewhere.'”
One barrier preventing people changing their lender is penalty clauses for leaving a mortgage during a headline rate period, and these will remain. Hotten says the penalty is normally six months’ interest.
But Harvey is unapologetic. “If a customer wants to get out of a mortgage, it comes at a price. The fact remains, if they struck a deal, they struck a deal.”
There are also costs associated with moving a mortgage. Hotten says valuation fees, legal fees and surveyors’ costs are about &£800 for a &£100,000 property. “But it’s possible to get a package where your new lender will pay those fees for you,” she says.
The new mortgage deals have already prompted Nationwide to launch a national press campaign. Halifax will follow suit by launching a TV campaign to promote its mortgages in a few weeks. Abbey National is also planning a campaign for April.
This is on top of the hefty amount of money the industry already invests in marketing.
But while competition remains so fierce, lenders will have to go all out to differentiate themselves and attract new business.