This talk was given on 31 March 2006
The text here may not be identical to the spoken text

Council of Mortgage Lenders
Annual Lunch 31 March 2006

Mortgage Madness


Hello. I’m a freelance journalist, I present Money Box on Radio 4, which is perhaps where most of you might know me from. I also write regular columns for Saga Magazine – looking round quite a few of your probably see that too. ‘I see that at my Mum’s’ or in the doctors. Yeah right.

I mentioned Money Box and of course on the radio no-one knows what you look like. Unless they look at the webcam and they think your face is about that big and yellow. And you move like this. I met someone earlier who said ‘Oh nice to put a face to a voice’ and I could just see her thinking ‘but not that face’. Good face for radio. Crap voice sadly but there we are.

I’ve never done an after lunch speech before. I’ve done Morning – serious. Afternoon – keep them awake. And I’ve done After Dinner – when you just tell vulgar stories. But After Lunch – you never quite know what to bring up do you?

Anyway I’ve decided to keep it clean I know we have mixed audience. Banks and building societies. Or as they’re collectively known now - multi-ties.

Two formal bits of small print. The views I express here are my own. I represent not Money Box nor Saga Magazine, still less, God forbid, the BBC. They are all clients but not employers. Second, if I mention individual banks, building societies, or brokers the comments will be factual. And I am not singling them out for criticism, they just happen to come top – or bottom – of some particular group or just catch my attention.

It’s been quite a week hasn’t it?

News on Tuesday that scientists had made a new contraceptive pill that would also stop PMT has been welcomed by 90% of women. The rest said ‘I don’t need a bloody pill!’

A million council workers went on strike over their pensions and the rule of 85. It’s a hard rule to explain but as I understand it, to pay for public sector pensions everyone else will have to work until they’re 85.

And the Co-operative bank is offering a new loan. 1% to 3% above base. LPPR they’re calling it. Labour Party Peerage Rate.

I went to buy a plasma TV this week. I already have one flatscreen TV on the wall in the kitchen. When my brother came to stay I showed it to him. And he peered round the back and asked ‘where’s the rest of it?’

But anyway I picked the one I wanted, shopped around, found the best price which was £899. Went to get it, got out my credit card and the woman behind the counter said

“that’ll be £994 please.”

I said “what – it says £899 in the best buy tables.”

“Oh yes she said but there’s a £95 arrangement fee.”

“Arrangement fee?”

“Yeah. I have to be paid, paperwork, lights. You wouldn’t like me to serve you in the dark would you?”

“But the best buy tables. You’re top. £899.”

“Yeah well we keep that price down and put up the arrangement fee” – she leaned over “between you and me.”

Well I was there, I liked the TV, so I got out my credit card and she put it in the machine.

“Check the amount and enter your PIN number”

PIN number. Don’t you hate that? So it’s your personal identification number number. Anyway. I checked the amount and it wasn’t £994, it was £1035.

“Sorry” I said. Why do we always apologise when we are being mugged?  “Sorry” I said. “It says £1035. Not £994.”

 She looked at the display. “Oh yes. There’s £41 HSC.”


“Yes. Higher Spending Charge. Experian says you are spending more than 75% of your available monthly income so there’s an extra charge.”

“What for?”

“Well, actually it’s an insurance policy so that if it turns out you can’t afford it, we still get paid.”

“So it’s an insurance policy for you, but I pay for it?”

“Yes. If we didn’t charge you for it we would have to put our price and lose our place at the top of the best buy table. You wouldn’t want would you?”

“So my £899 bargain was now costing me £1035. But I entered my PIN. And was told I could collect my TV in half an hour. So I had a cup of tea, went back, picked up the flatscreen and made for the exit. When I got to the door it was shut. And the security man said

“Leaving sir?”

“Yes please”

“That’ll be £50 please sir.”


“Yes sir. I understand you have paid the bill in full and the arrangements between us are over. So that’ll be £50 to finish everything off. Seal the bargain.”

“But I wasn’t told about that?”

“No sir. When you bought your television at, err…” he checked my receipt “…0930 this morning, we didn’t have a charge. But since then policy is to impose a leaving charge. And you’ll see in your contract that we reserved the right to do so.

“£50? To leave?”

“Yes sir. Good job you didn’t leave it til tomorrow. It’s going up to £100 then.”

Could any retail market work like that? Can anyone here think of a retail market that works like that? Where the product has one price. But there is a charge to start the deal, sometimes a compulsory charge to insure the deal, and a charge to end the deal. It’s madness isn’t it?

When I talk to investment people – which is more my normal audience – if you can call them normal – I do hold up the mortgage industry as an example at least of an industry where competition works. In the investment industry competition isn’t about consumers at all. It’s about competing for the attention of IFAs by putting up commission. For the customer competition raises rather than cuts prices. But in the mortgage industry at least competition has reduced the headline interest rate.

And it has done other things – good things. It has given us flexible mortgages where we can pay down our debt with no penalties. It has ended the scandal of only working out the interest due once a year so that now it is typically done daily. It has given people the opportunity to borrow more than the rigid rules of the past would allow.

But while these are advances, in the struggle to drive down the headline rate – and of course keep profits at £37 billion a year (and building societies forgive me, that’s just the 10 UK banks in 2005) – you employ teams of people whose only job it is to invent new ways of taking money off customers, preferably without them noticing. So we have arrangement fees – the highest fixed fee I could find was £1499 – Halifax on £2m-£5m loans. But Portman would charge £6250 arrangement fee on a half million pound loan on one deal. Portman is just one lender who disguises high arrangement fees by relating the charge to the size of the loan – 1.25% in this case. Does it really cost twice as much to arrange a mortgage for £500k as one for £250k? What do you do, draw it out in tenners and count them? And then with others like Cheltenham & Gloucester they depend on what type of loan you have. But a mention for Dudley BS and Stafford Rlwy BS who don’t charge arrangement fees. Well done.

And then some of you have Higher Lending Charges – that insurance product that protects you but the customer pays for – which applies to people who have the nerve to want to borrow up to the advertised limit of what you will lend.

But the stated fee or charge is just the start. Because you don’t send a bill do you? Arrangement fee £449 payable in 30 days. No. It’s payable in 25 years. Because you just add it to the loan. So £449 – modest little fee as we’ve seen – at 6.5% a year becomes £2167 just for allowing the customer to walk through the door.

And even that wouldn’t matter if you explained the consequences. But you don’t tell anyone that do you? The arrangement fee is quietly added to the loan and in effect borrowed over 25 years. John Charcol even puts that as a plus – “arrangement fee which can be added to the loan”.

I’d like to congratulate here Darlington Building Society. A colleague of mine took out a mortgage with it recently and the £354 arrangement fee was hidden even more carefully. It wasn’t added to the loan – in the sense that when she asked what her outstanding loan was that fee was excluded. When she asked specifically about it she was told it was there but it just ‘sat above’ the loan, not part of it but yes, as you ask, interest was being charged on it. And then she asked if she did pay the fee off would that count as the one overpayment she was allowed this year? You don’t mess with a Money Box producer. But to most customers that fee would have been invisibly racking up interest for 25 years. And at the SVR racking up a charge for credit of more than £1400.

In my book – which incidentally is out in three weeks and is called Live Long and Prosper – in my book, adding fees on to the loan without telling anyone is disingenuous at best.

And it gets worse. Cashback. Here is quote from Scarborough Building Society. Which tops the MoneyFacts cashback deals.

“For those who wish to release some cash, to buy a car or take a holiday, we offer a 10-year fixed rate mortgage with a very attractive 11% cashback. For example a fixed rate mortgage of £100,000 would provide you with £11,000 cashback to spend any way you like.”

This deal offers 6.94% fixed over 10 years with tough penalties if you leave early. So over the ten years that £11,000 spending money will cost you £21,517. Suppose you spend £10k on a car and the other £1000 on a holiday. You’ll end up paying for that holiday over ten years – by which time you might have had nineteen more holidays – and it will cost you £2157. Or if you do keep the loan for 25 years – inertia being what it is and after all some people still have money in Halifax Liquid Gold accounts – 0.6% return, wow! – that holiday will cost you £5351. The only surprise is this bargain isn’t advertised on afternoon TV by Carol Vorderman.

And it’s Building Societies that dominate the tables for cashback. Tipton & Coseley offers you up to £14k, Dudley BS and Chelsea BS offer 6% cashback. Ah, the benefits of mutuality.

I have a golden rule of borrowing. It comes from another book, which I wrote last year, called Money Magic. Never borrow for longer than the item you buy will last. So if you borrow for Christmas, pay it off before next December. If you borrow for a holiday pay it off before you take the next break in 12 months – or 6 months if you have two holidays a year. If you borrow for that new pair of shoes, well ladies be honest, pay it off by the next monthly statement.

Borrowing for a house over 10 or 25 years is fine. Because even the houses John Prescott wants us to build will last that long. But never ever borrow for a holiday or a car, not even a Volvo, over 10 years. At 6.94%. And having borrowed it, no possibility of changing your mind. Because that particular loan is completely inflexible and no repayment is allowed.

The latest wheeze to come out of the charging-customers-for-things-they-won’t-notice department is the fee the security guard wanted from me as I tried to leave the TV shop. When a customer comes to the end of the deal, and has performed their side of the contract month by month over 25 years, there is a sealing fee. On which, oddly, there is no ceiling. It can be quite different from the fee that was in place when the deal was signed. It’s the Gordon Brown approach to numbers – when he plays football he has a team of nine on the field and two men to carry the goalposts around.

MoneyFacts did an analysis of these administration charges, exit fees, redemption charges, discharge fees, deeds release fees, sealing fees – let’s ignore the calling-them-confusing-names-dept and call them end-of-mortgage fees – and it found that in 1996 the average was £56. Today it is £218. Quadrupled in ten years. A compound rise of 14.6% a year. Over that time prices have gone up 2.6% a year, wages have risen 4.25% a year, and share prices by 5% a year. Can you think of anything else that has gone up by 14.6% a year compound over the last ten years? Because if you can I’d like to invest in it. At that rate of growth someone starting a mortgage in 1996 with an average release fee in the contract of £56 would find at the end of their 25 year mortgage in 2021 that they had to pay £1674.

If you look in the very biggest dictionary – the 20 volume OED – you will find the word for this – complexification. The tendency of life to become more complex as it evolves. But in modern retail markets I use it to mean the tendency to respond to information and choice by making things so complex that no-one can, literally, work out the best deal.

It works like this. Competition allows a lot of providers in the market. And many products are just price. Gas is pence per kilowatt hour. It’s the same molecules through the pipe. Electricity is the same electrons. Phone calls are just how long, where to. But if you want to call from London to Paris at two on a Wednesday afternoon and you ask what is the cheapest way to do that – there is, literally, no right answer.

And it is the same with mortgages. What is the cheapest mortgage to buy this house? First you have to sort your way through fixed, variable, discount, capped, tracker – and that’s before we get to offset, current account, and credit impaired. And way before we reach LIBOR linked or dollar denominated. And even if you get to grips with those, there are arrangement fees, high lending charges, legal fees, survey fees. Amounts which it is impossible to factor in to the total cost without a computer. And then of course release fees. Which, just as you’re walking away from the deal, leap after you and bite you in the bum. Altogether the MoneyFacts database has 6437 residential mortgage products.

I wasn’t asked here today to do awards. But I thought it might be fun. So the awards for the largest number of standard mortgage products for ordinary borrowers. It was very close. Third with 43 products was Norwich and Peterborough. The runner up with 48 products was Northern Rock. But this month’s winners with 53 different mortgage products for the ordinary borrower – Halifax.

Why? Can anyone take in 53 different products and choose the best? And when they look at the whole market, can anyone rationally choose between 6437 mortgage products? No. Of course they can’t. Well, except Ray Boulger.

Now you might say here that there are online MoneyFacts calculators which show the cost of everything over any period you choose. But they are hard to find and are not in the normal best buys – how could they, you have to choose the period over which the total cost is calculated. Total cost calculations are for serious buyers – the Money Box producers among us. And in a week when the FSA tells us that 79% of people don’t shop around, they rely on product information or non-independent advice, it shows the importance of simple clear products from the manufacturers.

So why do you do it? Precisely because no-one can rationally choose between them. If they could, the cheapest would get all the business. And the rest of you would fold. Complexification is your answer to choice and competition. The deliberate act of making products so complicated that no-one can understand them. Can never be sure if they have been sold the right product or not. Find it hard to tell when the product goes wrong. And if it does, can never find the evidence to sustain a complaint.

So we employ a mortgage broker to guide us through the bewildering complexity of loans. And having found the best deal, and paid our survey fee, our legal fees, our arrangement fee, our higher lending charge and set aside money for our leaving fee and possibly our penalty charge if we want to go early, we also have to pay our broker a fee. Or commission. Or, usually, both.

Because what’s the point of being a middle man if you don’t charge both ends?

Among the many bees buzzing round my bonnet – I say bonnet, I’m the only person who at Easter actually wears a hive – is one labelled ‘commission’. In May I did a special Money Box for Radio 4 called Sins of Commission – you can hear it on our website – put ‘commission’ into the search box.

With producer Jennifer Clarke I visited a mortgage broker in Cheshire. He told us that he couldn’t make a living selling mortgages. His average loan was less than £100,000 and even one that big would only bring him £350. And with compliance etc it wasn’t worth it. He reminded me a bit of farmers I used to interview when I did business programmes who told me that every pint of milk they sold they lost one and a half pence. And I always used to ask them – why not sell your farm and retire.

But my Cheshire mortgage broker had a different answer. In his case it wasn’t charging a fee as well, he said people in Nantwich wouldn’t pay fees. Instead he added on life insurance, critical illness cover, and payment protection insurance – and contents and buildings insurance too if he could – and that boosted the £350 he earned from the sale to £2,000.

So was a mortgage a loss leader to get this other business? ‘Yes’ he told me.

People came for a loan. But they left with insurance.

Why does the mortgage industry pay people so little for selling mortgages that the only way they can make a living is to sell insurance as well? You cannot have a viable retail market where the shopkeepers are not paid enough to distribute your goods. Now I see the problem. If you paid advisers 1% to sell your mortgages – or perhaps a flat fee – then that would put up costs and that would raise the headline rate you had to charge by a fraction of a percent.

But of course you do pay 1% or more on some loans – so called impaired credit loans. Why is that? Is it because it takes more work to do an impaired mortgage? Or is it because once you leave the competitive world of the good credit mortgage where there is vast choice and where competition keeps down the headline rate you enter a world where people know they are going to be charged more, where they feel they have no choice, and where no-one notices if you stick on an extra half or one percent a year above what is needed to pay for the extra risk that an impaired credit risk entails. And you share that profit with the salesperson.

But for the competitive general market you don’t do that. And by keeping the distribution cost as low as possible you can keep the one thing you are measured by competitively – the headline rate – as low as possible and keep your product up the best buy tables. And by doing that you force the people who are there to sell mortgages to sell other stuff as well.

Now that wouldn’t matter if the other stuff was worth having. But many of these add-on insurance products are widely mis-sold. Concern about them extends from consumer organisations like Which?, Citizen’s Advice and the National Consumer Council to the Financial Services Authority and the Office of Fair Trading – which has now launched a study into how PPI was sold and the potentially high risk of consumer detriment. The FSA mystery shopping exercise on payment protection insurance published in November found that advice was poor, that commission could encourage mis-sales, training and competence was inadequate, and health and employment status was not established. Approximately half of the firms visited failed to ensure that customers did not buy policies on which they could not claim.

Your own figures show that repossessions will double this year compared to 2004. But PPI does not help with those. The biggest causes of the rise in repossessions are long term illness and redundancy. Even if it pays out, and your figures show that up to 15% of claims are refused, PPI only lasts for a year. The better product is an income replacement policy. But they pay much lower commission and are not generally sold.

And don’t say ‘nothing to do with me guv’. By keeping mortgage commission down you encourage the sale of these products by financial advisers. And of course your own staff sell them as a routine part of the mortgage sale process. Because profits are high. And by allowing them to be bundled with, and in some cases paid for by adding money to the loan, you are complicit in their sale. Mis-selling insurance is an issue for the mortgage industry.

Now when it comes to sales by financial advisers, half or more of your sales, you might think that you can rely on the FSA. After all, the people who are now regulated to sell mortgages are also regulated to sell insurance. But this is where life gets very complicated. This is another talk really – with slides – but take it from me that there are nine kinds of investment adviser, six kinds of mortgage adviser, and six kinds of insurance adviser. At least. And because you can combine any one of nine with any one of six and with any one of the other six, the maths means there are 4731 different types of financial adviser. At least. But I want to look just at one here. The mortgage adviser who is, well we can’t call them independent can we, let’s say whole of market for mortgages – which please note does not mean the whole of the market it means a panel of lenders you like – but anyway whole of market for mortgages but then adds on insurance as a non-advised tied sale. So this one person sitting in front of you who has stressed his or her ‘whole of marketness’ then offers you information about insurance which may not be suitable for you and, even if it is, may be a bad product. This confusion of independent-ish advice with tied non-advised sales can only act against the interests of customers.

You may say again that’s not a problem for you to sort out. But it is. Because it’s a problem your customers face when they are buying your products.

I’m going to end with a challenge to do something about the other end of life. Because adult life is in two phases. Phase one is when we are working and have a monthly or a weekly income. But we want to buy stuff that costs more than our regular income can support. So in this phase we want to convert income into capital – a car, a suit, a plasma TV, a house. And a whole range of financial products has been developed to deal with this phase of life. To buy a suit you use a credit card. To buy your TV you use a credit card or a loan. To buy a car you use hire purchase or a bank loan or one of those complex funding plans for cars – that make mortgages look simple. And of course to buy a house you use a mortgage. So the business of converting income into capital is the very core of the financial services industry.

But there is a second phase to life and it’s getting longer. In that phase income is restricted but capital is high. And part of that is the capital in the house people live in.

While your industry has devoted endless hours to devising endless ways to complexify the essentially simple idea of a mortgage, it seems to have devoted only a few nanoseconds to devising ways of turning capital back into income.

In this month’s MoneyFacts – and I know I use it a lot. Not just because John Woods is here. MoneyFacts is often called the bible of the financial services industry. Well if it is then I guess I am an evangelist. There’s always a text. In this month’s MoneyFacts there are 63 pages of mortgage products – 6437 distinct residential mortgage products from 135 providers.

Equity release on the other hand occupies one and a half pages containing 38 products from 20 providers. So a seventh of the providers of mortgages and each has two rather than almost 50 products. And they’re all the same. Now I’m not asking you to complexify equity release as you have mortgages. But it is quite clear that very little time and work has been devoted to devising products for this important second phase in life compared with the effort that has been devoted to making mortgages almost beyond human understanding and certainly beyond unassisted calculation.

Let me give you an example. My neighbour Alison is 84. She needs a hip operation and despite the Government doubling spending on the NHS she still has to wait a year in pain. She could go through BUPA and get her hip done in weeks for less than £7000. She hasn’t got the money. But she lives in a house she inherited which is now worth £400,000. Wouldn’t it be nice if Alison could borrow against her home to get the operation done and save herself a year of pain? But will any lender do that? Not when I enquired.

So can I suggest that you move some of the clever people from the taking-money-off-customers-so-they-don’t-notice department and get them to come up with flexible, innovative, good value products for this second phase of life. There is after all an estimated trillion pounds worth of property waiting to be converted into income. It will never replace pensions. The arithmetic just doesn’t work. But a good value equity release market could help to provide extra income to millions of people who are suffering their own pensions crisis.

So competition has worked in some ways. It has brought down the cost of borrowing – now cheaper than ever and cheaper here than in other financial areas where nominally interest rates are lower. It has broadened availability giving mortgages to people who would not have got them in the past. It has extended home ownership to a million more people in the last ten years. It has introduced flexibility and innovation.

But it has now gone so far that it has created a complexified market where rational choice is impossible. It has shifted costs away from the interest rate to other charges – including the cost of mortgage broking.

So the challenge for the industry is to keep the good things you’ve done. And offer simple products that meet people’s real needs. That lend them the money for a house over 25 years – but not to pay a fee, buy insurance, go on holiday, change their car. A system that has fair and adequate remuneration for distributors so it doesn’t encourage commission driven sales of unnecessary insurance. And more imagination in providing products that convert the capital you have helped people accumulate back into an income in the last phase of life.

That would serve your customers best.

And news just coming in though my earpiece. Speculation is growing that Tony Blair will stay on until 2010 after Downing Street confirmed his retirement party will be at Wembley Stadium.

Thank you.

31 March 2006

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