Access to quick, up to date information about our financial situation is crucial, allowing us to make decisions quickly and easily. No matter what the circumstances are, the ability to reliably check how our finances stand, and to re-arrange and make payments on the go is invaluable. Nowadays this is commonplace, but up until the year 2000 it was unheard of; banking was a clumsy, cumbersome affair, requiring a visit to a local branch or at the very least a telephone call. Hardly sleek and streamlined.
This all changed with the introduction of the First Direct online banking services, following their highly successful telephone and text banking services. The bank has, over the course of the past thirty years since its founding, demonstrated its ability to navigate the ever changing waters of the financial sector, re-imagining its services to provide precisely what its customers need. However, First Direct are not only a provider of convenient consumer solutions; they are also a well-established provider of private residential mortgages, with a proven track record of successful trading. As part of the mammoth HSBC group, First Direct have the clout to offer first-rate mortgages to their customers, ensuring that their products are reliable, stable and responsible. So what makes First Direct the “unexpected bank”, and how have they kept at the front of the pack for so long?
As banks go, First Direct are a fairly new organisation. Opened as a subsidiary branch of Midland Bank in 1989, First Direct were set up as an alternative to traditional high street banks; instead of requiring customers to travel in to their branches, taking time out of their days, their entire services were conducted over the phone. Customers could simply call up, wherever they were, and request services, check their balance, or ask questions – a revolutionary new approach which put customers first.
First Direct’s first centre opened at midnight on 1 October 1989, and fielded a thousand calls in its first 24 hours. Eighteen months later, First Direct registered their 100,000th customer, no mean feat for a business with no physical sales premises and no face to face customer interaction. Another four years after this and First Direct had achieved customer numbers of half a million, and were showing substantial profits; as a disruptive industry, they had proved that the “traditional” way of running a high street bank wasn’t working, and that customers valued the First Direct emphasis on flexibility, customer service and ease of use.
Up until this point, the services offered by First Direct were based on telephone systems; customers would ring a call centre, and their request would be handled by one of the trained personnel staffing the centre. With the advent of mobile technology, however, more methods of communication became available, and the new possibilities opened up through these advances allowed new avenues to be explored. In 1999, First Direct began offering an SMS based service, connecting customers with their accounts in a way that had never been seen before. Now, customers could receive direct alerts and balance notifications even when on the go, and could keep informed up to the very second as to the state of their finances. In addition to this, a “warning” text could be sent whenever a customer’s balance dropped below a certain level; this invaluable service meant that customers were never second-guessing whether they could afford to pay the rent, or to keep up on their mortgage. As long as they hadn’t received a reminder that their account was running low, they could confidently continue to spend. Nowadays, with instant access to our accounts available directly from our smartphones, it’s hard to picture exactly what a difference this made, because we’re so used to having this information available whenever we want it. In the 1990s, however, if you wanted to check your balance, you would have to visit an ATM or a bank branch, both of which could be frustratingly awkward.
Only a year after the launch of its SMS banking services, First Direct unveiled its online banking services, some of the very first interactive online services in the country. Up until this point, most banks had been content simply to list their company details and address on their websites, perhaps with a photo of their headquarters; First Direct, however, saw that the World Wide Web provided an opportunity to fast-track customers to the services they needed, and took steps to provide a solution for them. The result was First Direct online, the service which we know today as a service leader in the industry.
However, First Direct does not only offer fast, easy solutions for consumers, though they retain customer satisfaction at the heart of their business model. First Direct’s original parent company, Midland Bank, merged with HSBC in 1994, making First Direct part of one of the world’s largest financial organisations. With the backing of HSBC, First Direct has the financial clout to offer residential mortgages to customers, taking on the much larger responsibility that this entails. For customers, this is good news; First Direct has a proven track record of placing customer satisfaction at the very top of their business pyramid, and even won the MoneySuperMarket Customer Satisfaction Award for 2016. This means customers can rest easy, knowing that the products they’re offered and the company they’re dealing with are amongst the most trustworthy and reliable in the country.
So, as a mortgage provider, First Direct have a reputation for being upfront and honest, as well as offering good deals on their loans. But what sort of products do they offer? There are many hundreds of different products available in the private mortgage marketplace, and consumers have the choice of dozens of different providers; what makes First Direct the first choice, and why should consumers choose them?
Well, firstly, First Direct make a bold claim to their customers; you could be approved for a mortgage within a day. Not just an agreement in principle; an actual approval for a loan, potentially turned around on the same day that you talk to their mortgage advisers. Given the amount of checking which must be carried out, you can see why First Direct set themselves apart by offering such a service, but their recognition that speed can be of the essence in the house-hunting game drives them to exceed expectations.
There’s no such thing as the average house, nor is there an average house-hunter; every person is different, with their own needs, requirements and restrictions. That’s why there’s no “standard mortgage”, because clearly different buyers will suit different types of payment plans, and what suits one buyer perfectly might be inhibitive for another. First Direct offer a wide range of mortgages to suit every type of buyer imaginable, and for every bank balance.
The two core types of mortgage which First Direct offer are their “standard variable rate” (SVR) and “fixed rate” mortgages. The key difference between these two is that a fixed rate mortgage’s interest rate is held at an agreed level for an agreed period of time; this could be for 2, 3, 5 or even 10 years. During this time, regardless of the state of national interest rates, the mortgage will have a stable, continuous interest rate attached to it. Fixed rate mortgages have one big advantage; they’re predictable. You won’t suddenly find your mortgage bills going up in the middle of the year because of a spike in the market; every month will be the same, so you can budget reliably to meet your monthly payments.
However, there are a couple of downsides to fixed rate mortgages. Firstly, though you won’t be exposed to fluctuations in interest rates, these can also sometimes result in a better deal for borrowers; if interest rates fall, for example, you could end up paying less. If your mortgage is fixed, however, you won’t benefit from this decrease, and will remain at the higher, fixed rate. The other issue with a fixed rate is that it precludes the lender from adjusting interest rates to maintain their profitability.
Typically, lenders adjust their interest rates in response to the cost to them of borrowing money; if the Bank of England has set its base rate at 1%, all banks borrowing from them will be charged 1% interest. Banks will want to pass this cost on to their own customers when they lend the money out again, and will typically tack on a higher interest rate. This is why variable rates like the SVR are favoured by lenders, because if the Bank of England base rate increases, they can protect their profit margins by increasing their interest rates in turn. However, a fixed interest rate prevents them from doing so, and in order to protect themselves from future increases in the base rate many banks typically offer their fixed rate mortgages at above the going rate for their variable rate loans. Therefore, although a fixed rate mortgage can provide some protection against a rise in interest rates, they’re usually more expensive than an SVR if interest rates remain the same.
Banks don’t always raise their interest rates purely to maintain profit margins. There are other reasons why a bank might choose to increase or lower the interest rates it’s offering, beyond the level of the base rate. For instance, during a booming economy with an active real estate market, mortgage providers might raise their interest rates beyond the level dictated by the base rate, in order to increase profits. With SVR mortgages, banks are entitled to set their interest rates at whatever level they feel is appropriate, and have no need to justify their costs to consumers (though of course customers can always switch providers). Conversely, a bank might decide to underbid its competitors by squeezing their margins, forgoing immediate profits in an attempt to expand their customer base. In this case, they might reduce the interest rates associated with their variable rate mortgages even if the base rate remains the same.
Tracker mortgages feature an interest rate which directly follows the level of the Bank of England base rate, mirroring its fluctuations precisely. When the base rate goes up, so does the mortgage’s interest rate, and by the same amount. Mortgages of this type can benefit borrowers, because it protects them from mortgage providers seeking to increase their profit margins, since they’re unable to increase the interest rate beyond a certain level. However, as outlined above, in the event that the provider decides to squeeze their profit margins to attract new customers, borrowers with tracker mortgages will not stand to benefit.
Tracker mortgages are typically expressed as a percentage above the base rate, something like “BBR + 2.5%”. This means that the mortgages comes with an interest rate that follows the base rate and adds 2.5% on top; if the base rate is 0.5%, then the interest rate will be 3%. If this should increase to 1.5%, then the mortgage’s interest rate will cost 5%. First Direct offer tracker mortgages for many different customers, and in a variety of different formats.
Tracker mortgages, like fixed rate mortgages, are typically a temporary feature of the repayment plan, and will extend for a set number of years. After this period, the mortgage usually reverts to the First Direct SVR, although there are some cases in which a “lifetime tracker” mortgage is available.
An innovative way for borrowers to save money on their mortgages is through an offset mortgage plan. These relatively new types of loan reward borrowers who remain solvent, and can afford to keep a large pot of savings on hand. Unlike many mortgages, which require borrowers to repay interest on the total outstanding loan throughout the term, an offset mortgage allows the borrower to deduct their savings from the total amount of loan outstanding. Because they’re only paying interest on a smaller amount, this can save a considerable amount on their monthly mortgage payments, and can make all the difference.
For example, if a family has £150,000 remaining on their home loan, but has managed to put away £20,000 in savings, they can offset these against their mortgage capital. They’ll then only be charged interest on the remaining £130,000, which represents a substantial saving. Think of it like this; for every percentage point of interest they would have been charged on the £20,000 they’re not paying interest on, they would have had to pay £200. Depending on their mortgage deal, this could represent over a thousand pounds per year, and the best thing is that their money is still completely free for their own use; it isn’t tied up in a scheme, or locked away in a First Direct vault. If they decide to go off on holiday, or buy a new car, or need to repair their home, they can use their savings to do so.
One of the best ways for homeowners to save on their mortgages is to repay early. Because interest constitutes a large portion of the total cost of each mortgage, any chunk that can be repaid ahead of time will save a considerable amount over the course of the mortgage. Of course, not every homeowner is going to have the funds available to pay back a substantial portion of their mortgage ahead of time, but the option is still very valuable and, should the opportunity arise, can be a great way to save.
However, mortgage providers often exact a charge for early repayments, and the rules surrounding the early repayment of a mortgage can be complex. First Direct offers a variety of different loans which permit differing amounts of flexibility in payments, but there is typically a fee associated with repaying the loan in full before the term has expired. However, it is still possible to reduce the monthly payments necessary without incurring charges, in some cases.
First Direct mortgages are also available with no upfront costs through their “fee saver” products, which remove the cost of arranging the mortgage. These products are suitable for first time buyers who are stretching to make their deposit as large as possible, and don’t have the cash on hand to pay for more fees up front. However, it’s important to bear in mind that these fee saver products typically attract a marginally higher interest rate than comparable mortgages, so the convenience of saving on fees is often matched by higher monthly payments.
First Direct is one of the most forward-thinking banks operating within the UK today, and their willingness to embrace technological development is an example to others in their field. Not only that, but they couple this drive for progress with a deep-seated respect for their customers, and a desire to show them that they really matter. Many businesses content themselves with simply saying that they put the customer first – at First Direct, however, they clearly demonstrate that their customers are their number one concern.