Naive mortgage borrowers are ‘sleepwalking into a financial nightmare’

16 November 2017

Homeowners could be paying over the odds for their mortgage thanks to a lack of basic financial understanding, a consumer group has warned.

Research conducted by the Homeowners Alliance found that many borrowers do not fully understand the terms and conditions associated with their mortgage.

This could leave consumers on a poor value mortgage deal and paying more than necessary.

Paula Higgins, chief executive of the Homeowners Alliance, warns that consumers are at risk of “sleepwalking into a financial nightmare in a marketplace where rates will only rise”.

The study found that 64% of UK adults describe their knowledge of mortgage terminology as “not good” while more than a quarter (27%) of borrowers do not know their mortgage rate.

Many borrowers are unaware of the difference between the base rate, set by the Bank of England, and a standard variable rate (SVR) mortgage - which may be influenced by the base rate, but is set by each mortgage lender.

In addition, more than half (51%) of those surveyed say they do not know what a loan-to-value ratio is – this is the percentage of the value of your home which is borrowed from a lender.

But despite the lack of knowledge, many borrowers choose not to get professional advice from a mortgage broker. The main reason for going it alone was costs, with 38% of consumers having no idea how much they would be charged for getting advice.

“People don’t actually understand the product they’re taking out”

Mrs Higgins says borrowers must take some responsibility when taking out a mortgage.

“A mortgage is likely to be the largest financial commitment you’re ever likely to make so the fact that so many people don’t actually understand the product they’re taking out is worrying to say the least,” she says.

She adds: “Consumers must be able to take responsibility for their finances but in order to do this they need access to expert knowledge and guidance. It’s concerning therefore that over a third of borrowers have no idea how much financial advice from a mortgage broker should cost - clearly suggesting they have never sought it.”

A handy guide to mortgage terminology

The HomeOwners Alliance has issued the following definitions to make it easier for mortgage borrowers to understand the products they are taking out:

  • Arrangement fee: What you pay the lender to set up your mortgage.
  • Base rate: Set by the Bank of England, and influences lending interest rates charged by banks.
  • Discounted rate mortgage: This has an interest rate that is set a certain amount below the lender's standard variable rate which can move up or down.
  • Fixed rate mortgage: This has an interest rate that stays the same for a set period.
  • Flexible mortgage: Allows you to make overpayments, underpayments and perhaps take payment holidays.
  • Loan to value (LTV): Takes into account how much your home is worth, and reflects how much of your property is mortgaged and how much you own.
  • Mortgage agreement in principle: Needed before applying for a mortgage, and often before making an offer on a property.
  • Negative equity: When the value of your home falls below the outstanding balance on mortgage.
  • Offset mortgage: This is where you have savings with the same lender as your mortgage provider and they are used to reduce the amount of mortgage interest you are charged.
  • Standard variable rate (SVR):  The rate set by the mortgage lender, the lenders default rate
  • Tracker mortgage: This has an interest rate that is set in relation to the Bank of England’s base rate.

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