Stay loyal to your mortgage lender and you could be penalised by as much as £1,000 a year, according to new research by Citizens Advice.
If you don’t remortgage when your fixed term deal comes to an end, you become a cash cow for your mortgage lender which switches you onto a higher interest rate known as a standard variable rate (SVR). This increased interest rate results in you paying far more for your mortgage.
People who move onto an SVR after the end of a two-year fixed term mortgage deal face an average loyalty penalty of £439, for example.
“More than a million loyal mortgage customers are being stung with higher interest charges when their fixed deals end,” says Gillian Guy, Citizens Advice chief executive.
“Buying a home is a major life decision and borrowers taking out their first mortgage often spend a great deal of time working out the best option for them.
“Our research shows that many who choose fixed rate mortgage deals face steep price hikes once they expire. But two thirds of borrowers say their lender has never told them they could save money by switching.”
The research found that 1.2 million people on their lenders SVR would be better off remortgaging to a new deal. One in ten people are paying over £1,000 a year extra by staying on the SVR.
‘Lenders must be more upfront’
Shockingly, most people languishing on their lender’s SVR think they are saving money. Citizen’s Advice found that 51% of people with an expired fixed term mortgage thought they were paying the same amount of interest or less than new customers.
“Lenders must be more upfront and provide their customers with clear information about what could happen to the cost of their loan once the fixed term period ends,” says Ms Guy.
First time buyers are being especially hard hit by the huge gap between fixed interest rates and lender’s SVRs as they typically have bigger mortgages on longer repayment terms. As a result, they face paying an average £1,359 extra a year once their fixed deal expires and they are moved onto their lender’s SVR.
“While most mortgage borrowers understand that they need to consider switching when their initial fixed period comes to an end, so many are failing to do so,” says Ishaan Malhi, chief executive and founder of online mortgage broker Trussle.
“Lenders need to nudge their customers into action more often and there needs to be greater standardisation of the way that rates are advertised so that consumers can easily compare. It seems utterly counterintuitive that a market should punish its customers for loyalty and it’s clear that something needs to change.”
How much could you save?
You don’t have to be disloyal to save money. Citizens Advice compared the interest rates of the UK’s six largest mortgage providers to discover how much a typical SVR customer could save by switching to each provider’s cheapest fixed term deal.
Just switching to the best deal with your current mortgage lender could save you over £700 a year.
|Standard variable interest rate||Interest rate on a two-year fixed deal for a typical SVR payer*||Annual loyalty penalty for typical SVR payer|
*Defined as someone with £60,000 left to pay on their mortgage over nearly 10 years with median monthly repayments of £651. Source: Citizens Advice, July 2017.
However, you could be even better off if you shop around to see if you can get a lower interest rate from a different lender.
Not everyone will save money if they leave their lender’s SVR though, warns Citizens Advice. If you only have a small amount left on your mortgage it may cost you more in remortgage fees than the extra interest you’ll pay if you stay put.
The charity calculates that 83% of people currently on an SVR would be better off switching to a new deal.