Back in July the Financial Conduct Authority produced a review of the impact of the Mortgage Market Review and warned advisers biases held by the customer may affect their ability to assess product risks or mortgage features objectively and rationally.
The FCA concluded that as a result of pre-held biases, mortgage customers may not properly engage in discussions with their adviser about the right home loan for their needs.
The paper stated consumers partially switch themselves off to adviser’s questions where they are unsure about the process or why they are being asked about certain things.
Research undertaken for the FCA by ESRO, which consisted of interviews and focus groups, found customers often undertake their own research on rates, repayment methods and product terms before seeking mortgage advice.
It found that a number of customers had formed an initial preference for a product before seeking advice and often place strong emphasis on this initial choice throughout the advice process.
“Some also mistakenly believe the adviser’s role is only to find a product which meets their initial preferences and initial target monthly payment, and do not expect advisers to challenge them, or to spend significant amounts of time discussing their needs, circumstances or priorities.
“Many advisers place a great deal of weight on customer’s initial preferences – and in some cases, allow these to determine the recommendation, rather than taking reasonable steps to obtain all relevant information and assess suitability in light of the customer’s actual needs and circumstances.”
The regulator noted that advisers must still assess a customer’s needs and the appropriateness of this in light of their individual circumstances by applying judgement.
The regulator stated that some advisers took customers’ initial preferences at face value or asked them to choose specific types of mortgage products without assessing their needs and circumstances.
Although customers are responsible for their own decisions, the FCA flagged up that advisers must assess each customer’s needs and circumstances and use their judgement, knowledge and skill to recommend suitable mortgage products.
As with all mortgage applications, Brendan Gilligan, product manager at Yorkshire Building Society, says intermediaries must discuss their client’s financial circumstances to see which type of mortgage would best suit their needs.
For example, he says they may prefer the lower overall cost, lower monthly repayments or lower up-front costs depending on their position.
As a rule of thumb, mortgage advisers FTAdviser spoke to point out the smaller the mortgage and the shorter the term of the initial deal, the bigger the impact of fees on overall value.
Therefore Ray Boulger, senior technical manager of John Charcol, says a fee-free mortgage will normally be more suitable for someone wanting a two-year, or perhaps three-year, fixed or discount/tracker mortgage for a relatively small amount.
Mr Boulger says advisers must calculate the total of interest payments over the deal period and add this to any fees, for both the best fees free mortgage and the best with fees.
He says advisers should then compare, assuming that at the end of the deal period the client expects to either do a product transfer or remortgage.
Mr Boulger says: “A golden rule is to ignore the APR, which will only mislead, assuming the client expects to change their mortgage after the deal period.
“On a two-year deal in particular the interest rate is almost irrelevant in the APR calculation as by far the biggest influence is the standard variable rate or whatever the revert to rate is.
“It is more complicated for term products, such as a term tracker, as one has to take a view on how long the client will keep the mortgage to decide over what period to do the calculation.”
Charlotte Nelson, finance expert at Moneyfacts, warns too many borrowers still focus their initial attention on getting the lowest possible rate, without taking into consideration the true cost of the deal, where fees can have a significant impact.
In many cases, she notes low-rate deals are often accompanied by a hefty fee, which can work out as being more expensive than opting for a no-fee option.
Ms Nelson says: “Many may assume that a fee-free deal is not cost-effective over the long term; however, this is not the case.
“In fact, the difference in rates between the average two-year fixed rate mortgage with a fee against the average fee-free deal is just 0.2 per cent.
“It could be a costly mistake for borrowers to ignore the fee-free options, as by the end of a mortgage term they may find that they have thrown away money that would have been better spent paying off the mortgage.”
She adds that by opting for the lowest fixed rate fee-free deal, borrowers could save up to £1,500, regardless of the length of the mortgage term, when compared with the true cost of a low-rate deal with a fee.
“Borrowers trying to decipher the maze of mortgages should do their homework to work out the true cost of the deal to ensure that they pick the right one for them.”
