What does Santander's bid for Alliance & Leicester mean to borrowers?

Posted on 14 July 2008 by Ray Boulger

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Alliance & Leicester’ (A&L) proposed take over by Santander is bad news for borrowers in so far as it almost certainly means there will be less choice in future because there will be one less brand in the marketplace. However, consolidation is an inevitable consequence of the funding problems lenders face as a result of the credit crunch and at least it is better than a lender withdrawing from the market, as has happened with a number of specialist lenders, especially those who used to focus primarily on the sub prime market. It would be amazing if there is not significant further consolidation amongst mortgage lenders, including building societies, over the next year or two.

It will no doubt take some time before A&L is fully integrated with Abbey but their funding costs will be quickly be reduced as a result of Santander’s higher credit rating. During this period A&L will be able to offer more competitive pricing should Santander’s appetite for new business justify it. A&L has deliberately taken a back seat on gross mortgage lending this year, to concentrate on retaining existing customers, but last month launched a very competitive fully flexible 2 year tracker to boost its market share.

Abbey has recently spent a large amount on a new computer system and I understand this will enable it to offer more features on its mortgages, although none have appeared so far. It seems likely therefore that Santander will in due course discontinue use of A&L’s system, which will be a shame because A&L is one of the few lenders to offer non offset fully flexible mortgages, although currently it only offers this feature on tracker mortgages. With a fully flexible mortgage borrowers can repay the mortgage down to £1 without incurring an early repayment charge and borrow back any such overpayments by way of a lump sum, payment holidays or underpayments. Abbey offer offset tracker mortgages, although bizarrely they continue to call them Flexible Plus rather than use the generic term of offset, but these are usually more expensive than a non offset fully flexible mortgage and so it is good to have a choice between both options. Both basically do the same thing but offset is more convenient, whereas a non offset fully flexible mortgage is usually cheaper.

I hope Santander will bear this in mind and retain the best features of A&L’s mortgage range to enhance their overall proposition, rather than simply effectively, as far as the mortgage market is concerned, buy a mortgage book. Originating new mortgages now is not a problem but real competition will return to the market at some stage and having the ability to offer a wide range of options will then be important.

One other difference between Abbey & A&L is how they treat existing customers when they come to the end of a deal. A&L offers existing customers the same deals as new customers, but typically charges a product transfer fee of £250 (which is less than their £295 exit fee!), whereas Abbey’s retention policy is the most non transparent of all the major lenders. They decide what, if anything, to offer existing customers on an ad hoc basis, no doubt taking into account how much they want to keep that customer and what options to remortgage they are likely to have.

Robert Peston at the BBC makes the point that there could be competition issues. As A&L only has a 3.6% share of the UK mortgage market this will not be an issue, despite Abbey’s market share for the first half of 2008 probably being close to market leader’s HBOS’s. It is probably current accounts where the Competition Commission is most likely to be interested, but I have no doubt that the combined weight of the Bank of England, The Financial Services Authority and The Treasury can be brought to bear on the Competition Commission, if necessary, to avoid putting at risk a take over the authorities will be very keen to see go smoothly.

UPDATE. With reference to the penultimate paragraph I have now been advised by A&L that they recently abolished the £250 product transfer fee. Also, there is not much overlap in the Branch networks of Abbey and A&L as Abbey is more southern based, with A&L primarily in the Midlands. That should be good news for branch staff. Lets hope that Santander decides to keep both mortgage brands, in which case it should be a win win for consumers as choice will not be reduced and A&L's lower funding costs via Santander will enable them to offer cheaper products or make more profit, or a combination of both. However, I fear this is wishful thinking.

Categories: Bank of England, Mortgages, Miscellaneous

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