Logic tells us that if two loaves of bread of the same quality are priced so that loaf A is cheaper than loaf B, then clearly loaf A is the one we should buy. Indisputable fact. We can make the same case in an infinite number of examples. The key considerations are that there be no material difference in the makeup of the object or the impact the purchase will have on the person buying the product.
When assessing which mortgage is the most suitable for customers, having chosen candidates from the broadest selection of suitable alternatives that could match the borrower’s needs and individual circumstances, advisers then run into a knotty issue. Namely, the definition of which is cheapest.
If we accept, without further scrutiny, that the best mortgage among those options which fulfil our customers’ needs is the one which has the lowest rate at outset, then are we really providing our customers with the ‘cheapest’ or just ticking a box and in fact not doing the job we are being asked to undertake?
Understandably, the regulator wants the best outcomes for customers and sees cost as the key determinant in assessing the right mortgage or lending arrangement to recommend. However, the obsession with ‘the cheapest’ has led to a skewing of the meaning. For advisers who use sourcing systems every day, the default setting, after all the data has been fed in, provides a list of lender products in order of headline rate cost – i.e. the cheapest available monthly payment at the start of the mortgage.
Job done? Hardly. What we should be ensuring is that the definition of ‘cheapest’ also pays attention to value. Mortgages which have a notional term of 25 years might have fixed or discounted rates over a set period within that notional term. While a diligent mortgage adviser would ensure that their client remortgages before the SVR becomes applicable, the fact remains that just because a mortgage sits at the top of a research list on a system that has no responsibility for the accuracy of its data for example, it does not mean that it represents the best value for a customer who may not expect his or her mortgage to be the only mortgage they have in their lifetime and therefore look to pay it off after 25 years. Property ownership is just not that simple.
Let’s also not forget that comparing like for like can throw up anomalies that nullify the argument that the cheapest headline rate is, therefore, the best for the customer. What are the charges being levied associated with the mortgage with the cheapest headline rate? How about the penalties for early redemption and particularly at this time when lenders are struggling to cope with the post national lockdown and stamp duty holiday housing market boom? Will the cheapest mortgage still be available when required and can it be processed in time to complete?
As an industry, we need to work with the regulator to clarify what cheapest means to customers, so that the future definition reflects the actual value of our recommendation and mitigates any risk that we become glorified price comparison websites. The Mortgage Market Review demonstrated that the real value to customers lies in the advice that complements the product recommendation. The regulator’s investigation into the GI market and the disparity of pricing to new and existing customers provided evidence that headline rates do not necessarily offer a true reflection of the value of advice.