Are product transfers always the right option?

    Marie Grundy - Managing Director of Residential Mortgages and Second Charges

Until fairly recently, nobody knew for sure how large the product transfer (PT) market was, other than it was 'big'.

It wasn't until UK Finance started recording PT data in 2018 that it emerged how enormously popular rate-switches are among borrowers.

Last year alone, some £219 billion was lent to borrowers opting to stay with their current lender, an 11% increase on the previous year. 

To give you a sense of how gigantic a number that is, gross lending only totalled £226 billion last year. Therefore, the PT market is nearly as big as the purchase and remortgage markets combined.

While PT lending is expected to fall 8% this year, UK Finance predicts it will still reach £202 billion, meaning rate switches will remain a highly popular option among borrowers. 

The benefits of a PT are obvious. For a start, they don't take as long, the fees tend to be lower and there are far fewer hoops to jump through in terms of affordability.

That makes a PT an attractive option for borrowers whose circumstances may have changed and who may now fall foul of High Street lending criteria.

But does that mean PTs offer the right outcomes for all borrowers? Yes, rate-switches are useful tools in a broker's armoury, but there are many reasons why these product options may not be right for a borrower. 

For a start, there may be more suitable deals on offer elsewhere in the market. While affordability has become more challenging as rates have risen, all lenders assess it differently.

Therefore, while your client may not meet one lender's requirements, they may meet another's/ It's worth taking the time to invest in the tools to allow you to assess affordability effectively.

It's also worth seeing what else is out there before recommending a PT, that's especially true where a borrower has complex income or non-standard borrowing requirements.

Sourcing systems are an invaluable tool for brokers, but the emphasis tends to be on rate and some element of criteria filtering, but not affordability. Therefore, relying too heavily on them for refinance cases may mean your client misses out on a more appropriate deal. 

It's also worth noting that there are limited product switch options for borrowers with specialist lenders, making a whole-of-market search a necessity.

Perhaps the biggest drawback of PTs is that they are simply pound-for-pound transactions, meaning borrowers cannot increase their loan size. 

That may be fine for most borrowers, but there will be plenty out there who need extra capital to consolidate debts, make home improvements or for something entirely different. 

How do you help these borrowers? The obvious option would be to go down the traditional remortgage route, if possible, which would allow your client to release more equity.

However, as I have already outlined above, that may be a challenge if your client's circumstances have changed and they no longer meet high street lending requirements or if they have an interest-only mortgage, for example. 

In these circumstances, a PT may be the sensible option, which an additional second charge loan to cover their additional borrowing needs.

Second charges have an unfair reputation of being an option of last resort, but both brokers and borrowers are increasingly aware of their value. 

A second charge loan can be useful where a homeowner wants to borrow more money but is locked into an attractive fixed-term mortgage that they don't want to disturb.

Many second charge lenders also tend to offer more scope on affordability, as well as generous loan sizes and competitive rates. That makes them highly attractive to those who want to borrow significant sums of cash.

PTs are undoubtedly an incredibly useful option for brokers, but it pays to take a step back and ask if your client could be better served moving to another lender. That's especially true if they have further borrowing requirements.

If that's not possible for affordability reasons, then a PT and a second charge mortgage may well be the most sensible route to take for many borrowers. 

I find that brokers often underestimate the number of clients they have on their books who want to borrow more. But there will be more than you think, so it's worth bearing that in mind when they come to refinance.