2003

Mortgage churn costs UK mortgage providers over £1.5 billion a year - and will be a continuing challenge for at least two years - Study findings from PA Consulting Group - 24 March 2003

'Churning' between mortgage providers - when customers shop around to take advantage of cheaper mortgage deals - will be an increasing challenge for the UK's mortgage providers over the next 24 months¹, and one that will cost the industry an estimated £3 billion over that period, according to a new study from PA Consulting Group.

The research, conducted in conjunction with the Council of Mortgage Lenders and covering 57% of the mortgage industry, focused on the causes of churn and on how lenders are responding.

Mark Roberts, one of the authors of the report, comments: "We have seen a radical change in consumer behaviour, brought about by discounting and special deals, which was unheard of until quite recently. Mortgage churn presents an increasingly expensive challenge to lenders. While some are beginning to respond with well thought out retention strategies, most have a long way to go."

Key findings are as follows:

• While mortgage churn (excluding the effect of growth in the mortgage market) has doubled over the last seven years, two thirds of lenders are unable to quantify how much it is costing them.
• 75% of lenders say that they are focused on gaining new business and 60% are still promoting churn-creating products. An over-riding motivation to maintain or increase market share has created an environment where competition is almost exclusively price-based and churn is reducing the underlying profitability of mortgage lending.
• Most lenders, in focusing on acquisition of new customers, are not assessing those customers' propensity to churn. In fact, only 16% are able to assess the likelihood of these new customers churning - and even fewer then take this into account in accepting new business on discounted offers.
• 60% of lenders don't understand why customers leave or close their mortgage account, and almost three quarters do not know the lifetime profitability of each customer. 64% also don't know the annual profitability of each customer, or the profit lost through churn by product, channel or segment.
• There is a dilemma in that many lenders aim to treat new and existing customers equally but this is frequently set aside in order to grow the business in a price driven market. This has caused a quandary for some mutuals which particularly aspire to the principles of equality and fairness.

Tom Watson, the joint author of the report concludes:

"We believe that 'the next big thing' for mortgage lenders is now about a clearer understanding of the segments within the customer base, and the development of mortgage propositions that are more precisely targeted to those segments. This approach should provide wins for both the industry, in reducing the high costs of handling churn, and for the consumer, through offers which really fit their needs and preferences. Overall, the industry is working hard on this issue, but there is a long way to go, and we can also expect further re-structuring over the next couple of years."

¹ More mortgage tie-in periods will end over each of the next two years than was the case in 2002

- ENDS -

For more information, please contact:

Heather Smith PA Consulting Group 123 Buckingham Palace Road London SW1W 9SR United Kingdom Tel: +44 20 7312 4975 Fax: +44 20 7312 4639 E-mail: heather.smith@paconsulting.com

Notes to editors

1.    Press copies of the report, Stuck on the mortgage-go-round, a PA report on mortgage retention in the UK, are available from heather.smith@paconsulting.com

2.      About the research
The objectives of this joint CML and PA study were to understand the key reasons why mortgage churn is on the increase. The Mortgage Retention Study's aims were:

• To understand the existing balance between retention and acquisition strategies, achieved at the industry and organisational level
• To investigate further the reasons behind the increase in churn
• To evaluate the measures, that are either currently being taken or planned, to contain churn and its detrimental impact
• To identify the strategies, principles and processes being used by lenders to address the challenge.

The study focused on four key decision areas that would impact on churn and a lender's ability to manage it, which the report refers to as the four pillars: acquisition and retention strategy; mortgage proposition; mortgage retention processes; and management information.

3.    Research methodology
Initial interviews took place from July to September 2002. In this phase PA gathered completed questionnaires and conducted face-to-face interviews with senior personnel in companies which together account for some 57% of the industry in the UK (based on mortgage balances outstanding).

4.   Measuring mortgage churn
An unexpected challenge for the study team was to identify a consistent and robust single measure for churn. The study uses two primary measures of churn - mortgage stock turn and replacement ratio. Mortgage stock turn measures the rate at which the stock of mortgages is turning over but its major disadvantage is that it can be distorted by other market influences such as growth in the mortgage market. The replacement ratio is an attempt to measure churn while taking account of growth. It eliminates the impact of growth and measures the proportion of the mortgage book that must be replaced before any growth occurs. Both terms are explained further in the report.

5.   PA Consulting Group

PA Consulting Group is a leading management, systems and technology consulting firm, with a unique combination of these capabilities. Established almost 60 years ago, and operating worldwide from over 40 offices in more than 20 countries, PA draws on the knowledge and experience of around 4,000 people, whose skills span the initial generation of ideas and insights all the way through to detailed implementation.

PA builds strategies for the creation and capture of shareholder and customer value, and helps clients accelerate business growth through innovation and the application of technology. PA works with clients to improve performance, mobilize human resources and deliver change effectively, including managing major projects, and designing and implementing enterprise-wide systems and full e-business solutions.

PA focuses on creating benefits for clients rather than merely proposing them, and this focus is supported by an outstanding implementation track record in every major industry and for governments around the world. PA also develops leading-edge technology both for its clients and within its own portfolio of venture companies in areas ranging from software to wireless technology to life sciences.

PA distinguishes itself from its competitors through the range and quality of its people, the depth of its industry insight, its development and use of technology, and also its independence and culture of respect, collaboration and flexibility in working with clients.

We are proud that our clients say 'PA makes it happen'.

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