Information and advice help consumers make the right choices
Published: 3 July 2013 | Author: Bernard Clarke
In responding to a recent article in Which? on the ability of consumers to understand mortgages, we pointed out that the borrowing process incorporates a series of checks and balances intended to ensure that the customer sees the whole picture of rates, fees, charges, total costs and key characteristics of loans.
The 'key facts' illustration (KFI) makes it compulsory for lenders to present detailed information about mortgages, based on the customer’s individual circumstances and in a standardised format. That enables borrowers to become familiar with how the KFI document works and to make comparisons between products. The KFI has been carefully designed to provide consumers with all the important information about loans, and consumers are able to get as many illustrations as they want for different mortgages before deciding which one to apply for.
Borrowers do not, in real life, have to make choices based on the very limited information that Which? used to gauge the awareness and capability of consumers to decide which loan is the cheapest option. In our view, the Which? findings are not a reliable guide to consumer behaviour because:
- the system of choosing a mortgage gives them more – and better – information, targeted to their circumstances, and often supported by advice;
- more than half of people buy their mortgage through a broker, usually with advice;
- most people are aware that they need to look not just at the headline rate but also at other fees, product characteristics, the APR and the total cost of the mortgage, as well as what happens at the end of any introductory period, to make sure they understand the key features of the product they are considering;
- there is a likely to be a significant difference between the level of care people take in a survey for a magazine like Which? compared with the real process of choosing a mortgage, and it is misleading to think that people will rely on such minimal comparative information before deciding which loan to apply for; and
- disclosure of information is not likely to be the main issue, although how consumers use it may sometimes be a problem. However, if people do not have the skills necessary to compare products effectively, they have the option of taking advice.
We recognise that there is a trade-off in the mortgage market between complexity and choice, and agree that it is helpful to consider the ability of consumers to understand products when designing and marketing mortgages.
We also recognise that having different rates and product features expands choice for consumers, enabling them to compare mortgages and choose the best option depending on their circumstances. This was recently recognised in an article in the Express, which showed that the suitability of mortgages with different rates and fees could vary depending on the borrower’s needs.
The Express article assessed the suitability of two different mortgages depending on how much the customer wanted to borrow. Mortgage A had a five-year fixed rate of 2.49% and a fee of £1,999, while mortgage B charged 3.09% for five years but had no fee.
The article concluded that, for a borrower wanting a £300,000 loan, mortgage A would be cheaper by more than £2,500 over a five-year period. However, for a customer looking to borrow £75,000, mortgage B would lower total payments by more than £600 over five years.
Although both mortgages were relatively simple and straightforward, the examples in the Express article illustrate the trade-off between choice and complexity. Offering mortgages with different features, costs and rates widens choice, and enables consumers to select the best option in different circumstances.
The key is having products presented to customers with all the relevant information in a way that enables them to make comparisons. If consumers do not understand their choices properly, they may want to consider seeking advice.