Early Repayment Penalties

dwight-van-man

MarkyMarkD wrote: »

I didn't realise that NR did that. It's pretty stupid of them, particularly given the way rates have been rising recently.

Obviously it was a great idea for them when rates were coming down.

Not really that stupid - the likliehood of losing a client at the point of a house move is pretty high regardless of whether they have to pay an erc (there is an industry wide percentage which I can't remember but it was high 20s of people who had paid an erc to move to another lender while moving house) - so offering an incentive like this encourages the client to stay (and these are cheap clients to retain) by giving them potentially a good deal, benefits the broker by not having split product end dates for future remortgaging and by paying a proc fee for the port - so ultimately benefits the lender. And as with everything else NR do, rate is balanced by fee income....

MarkyMarkD

They aren't cheap to retain at all if they are paying a standard proc fee - they are just as expensive as any other new customer, except that they aren't going to stay as long AND the extra borrowing is going to be loss-making if it's offered at an old rate and rates have risen.

TwelfthMan

This must be a massive loss leader for Northern Rock. Picture a scenario where someone has a £40k mortgage and tied into a fixed rate at 4.49% early in 2006. They now decide to move to a much bigger house and need a £300k mortgage. How can NR possibly allow the customer to take the extra £260k at 4.49% with the way rates have gone since then?? Surely it would be better to lose the customer than offer loss making rates.

MarkyMarkD

Exactly my point, TwelthMan - thanks.

But NR's recent results revealed how daftly they have been running their business - not hedging fixed rates until the mortgages completed, leaving them exposed to endless rate increases between application and completion, and then this.

dwight-van-man

In terms of product design, it does make sense for NR to take this stance re porting - look at the structure of NR's product range and the product split. Roughly 50-60% of business on the books is Together and a high protion of the remainder is long term fixes, NR having a higher turnover of, in particular, five year fixes due to the higher multiplier, so porting on these deals is not going to have the same impact as porting on a loss making two year deal because they're more profitable. Allowing the client to borrow more on the sale rate encourages them to stay thus increasing retention, and increases client satisfaction so when they do come to the end of the deal, they are more likely to remain with NR - and NR's retention ratio is the best in the industry. As for the cost of obtaining/retaining these clients - it is cheaper that attracting new business. Firstly you don't have the cost of declines, secondly, these clients generally score higher than new clients because of their track record, thus allowing them to borrow more, also because of this, the processing time is cut down and a higher proportion of clients will come direct than new business. Clients on these products tend to make greater use of the flexibility which in turn is more profitable, particularly redraw, and in turn again, tend to remain as clients after their deal ends as they value the facility. And fees.

At the end of the day, porting doesn't account for a huge amount of new business and is overall still more profitabel than say, large loans.

The results did suck though....