How to save 1.2 million people money on their mortgage

These 6 things should change so people can get the best deal

Spencer Thompson
We are Citizens Advice

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Loyal customers are paying £439 more than they should on their mortgage.

This ‘loyalty penalty’ is similar to the retail energy market, where we know that those on the default tariff pay an average of £141 more a year than those on the best introductory deals. When it comes to broadband, consumers pay £113 more a year once their initial deal ends.

Our latest report uncovers the scale of the loyalty penalty in the mortgage market.

Why does the loyalty penalty exist?

When people take out a mortgage they are often initially charged interest at a fixed rate. When a fixed rate deal ends — typically after 2 years — they are automatically switched to a standard variable rate (SVR) mortgage.

We looked at prices from the 6 largest mortgage providers who represent three-quarters of total UK mortgage lending. Our analysis shows that a typical customer on a standard variable rate could save £439 a year if they switched to a fixed rate deal.

First-time buyers — who typically have more mortgage debt — get an even worse deal. We found that a typical first-time buyer would pay an extra £1,359 a year once their fixed rate deal ends.

Vulnerable households are also more likely to be on a SVR. Almost half of those on the SVR are from middle or low-income households and older people, or those with fewer educational qualifications, are more likely to be over-paying on their mortgage.

Currently, 1 in 5 people are on a standard variable interest rate mortgage and the majority haven’t re-mortgaged in the last 10 years. If this continues, many will pay thousands of pounds more than they should over the lifetime of their mortgage.

We estimate that 1.2 million people would be better off if they switched to a new deal.

The loyalty penalty has got worse

The loyalty penalty is growing because mortgage providers have lowered their best interest rates to attract new customers and retain existing ones. At the same time, standard variable rates have remained largely the same. Currently, there is a 3 percentage point gap between the average SVR and the best available fixed rate (see chart below).

Standard variable rate compared to best fixed rate available. Source: Bank of England Bankstats database

As in the energy market, it is those on new fixed deals who are experiencing the benefits, with little incentive for lenders to encourage those on expensive SVRs to remortgage.

Why aren’t people switching mortgages?

Despite the potential cost savings, many people aren’t switching mortgages. This is partly because they aren’t aware they are overpaying. Our research found that over half of those (51%) on expired fixed term mortgages wrongly think they pay the same or less than newer customers.

Others aren’t switching because of the complexity and time involved in doing so. A quarter of people who remortgaged said they found it difficult. 39% say they do not have enough time to shop around.

What should be done to stop customers being overcharged?

Here are six things we think should be done by government and regulators to help ensure mortgage customers are always getting the best deal.

  1. The Financial Conduct Authority (FCA) should require lenders to provide clear, upfront and standardised information about their SVRs. This should be available before agreeing on a mortgage with a new customer and when informing existing customers of interest rate rises.
  2. People should be able to choose when and how their provider contacts them to inform them that their fixed rate deal is due to expire. Giving people choice over when and how they receive prompts would help to ensure they are on the best deal.
  3. The standard variable rate term should be changed. When providers refer to the SVR as ‘standard’ it makes it seem normal. Changing the term to ‘expired rate’, or something similar, would help customers to understand how their rates have changed and encourage them to switch to a better deal.
  4. All customers should be offered the same mortgage deals. Some mortgage deals are only available directly from a lender or intermediary. This means that sometimes existing customers are offered a worse deal than new customers. This discourages customers from switching and increases confusion in the market.
  5. The FCA should research how the fees involved in remortgaging put people off switching. Information on the fees involved in switching providers or remortgaging is often not presented simply. This complicates the switching process and often stops customers from switching.
  6. The FCA should protect vulnerable consumers. We found that older and low-income consumers are more likely to pay the SVR. The FCA should consider offering vulnerable consumers protection from the loyalty penalty — this could include limiting the additional amount someone can pay from moving on to the SVR.

The measures we recommend would help to transform the mortgage market. Mortgage providers would no longer be able to benefit from customer loyalty and people would always get the best deal on their biggest expenditure. We will work with the government, the FCA and lenders to make this happen.

You can read our full report here.

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