How to avoid paying the loyalty penalty on your mortgage
Whether we think of family, friends or our pets, most of us see loyalty as a positive attribute to have.
But for homeowners, it can be quite the opposite, as new evidence suggests many of us are forking out thousands of pounds every year in excessive mortgage fees by sticking with one lender.
A loyalty penalty occurs when a customer rolls onto the lender’s standard variable rate (SVR) after their initial fixed rate has expired.
Last week, Citizens Advice published a report which revealed that around 1.2m borrowers are being slapped by these penalties.
Figures from the consumer watchdog found that an average SVR payer on a two-year fixed rate mortgage faces a penalty of £439 a year, while one in 10 are paying £1,000 too much every year.
Tricky market
Part of the problem for many consumers is that they find the mortgage market far too complex, and simply don’t have the time to shop around to get the best deal.
Daniel Hegarty, chief executive of digital mortgage broker Habito, says lenders draw customers in with cheap deals which grow expensive later, knowing people are too busy to think about moving on.
It’s very common to switch mobile phone provider or energy supplier to get a better deal, but when it comes to mortgages, most consumers don’t even understand how the market puts them at a disadvantage, the Habito boss says.
Wave of change
Experts are calling on the City regulator, the Financial Conduct Authority, to force lenders to improve the way they nudge customers into action and to standardise how rates are advertised so that consumers can easily compare.
Chief executive of online mortgage broker Trussle, Ishaan Malhi, says: “it seems utterly counterintuitive that a market should punish its customers for loyalty and it’s clear that something needs to change.”
But in the meantime, there are a number of ways you can ensure you don’t fall into the loyalty penalty trap.
Alarm bells
Set a reminder to talk to your bank three months before your current rate comes to an end.
“While the process with online brokers is now fairly rapid, there can still be hold ups elsewhere,” Malhi says, pointing out that lenders may be dealing with high demand for a product or the application process might be slow. Conveyancing can also take up to six weeks.
You’ve got mail
Letters might be an archaic form of communication in our twenty-first century world, but lenders usually let you know when your initial term is coming to an end via post.
The Trussle founder says: “while some companies are starting to modernise their prompting methods, not all will send text or email reminders. So until this becomes standardised across the market, it’s vital that you read all of your letters.” Also make sure you keep your lender updated with your contact details.
Rate gap
When you sign up to a mortgage, check that you’re aware of the lender’s SVR as well as their fixed rate. You might be shocked by how big the jump is, which could influence which lender you choose.
Also make sure that you’re comparing apples with apples, Malhi adds. “Mortgage products often come with additional charges and incentives which can make it tricky to compare rates.” When in doubt, just take the interest, fees, and any incentives into account in order to draw a true comparison between products.
Plain English
The financial services industry is renowned for using jargon that flies over people’s heads, which means there’s a danger you could be signing up to something you don’t fully understand. So don’t be afraid to ask your broker or lender to explain things in layman’s terms if you’re unsure of the terminology.
New breed
A mortgage broker can help you find the most suitable deal. Technology has created a new breed of mortgage broker, and online services – such as Trussle and Habito – can search for thousands of mortgage products within minutes.
Some of these brokers also offer additional services, such as notifying you when your fixed rate period is coming to end.
On the prowl
Finding out if you are eligible for a better deal doesn’t involve a credit search, so don’t be afraid to shop around for a product that is well suited to your needs.
It’s important to know the different deals available in the market so you can make a decision you are confident about.
Nasty break-up
Don’t worry about the pile of admin you’ll have to plough through when you make the switch. Your new lender will usually appoint solicitors and talk to the old lender for you, says Hegarty. Also keep an eye out for deals where you don’t have to pay a fee – remortgaging doesn’t have to be a costly affair.
It’s easy to feel bombarded by the complicated – and sometimes opaque – mortgage market, but this doesn’t mean you should stay loyal to your lender and fall victim to extortionate fees.
Also make sure you use technology to your advantage – it could save you thousands of pounds every year in unnecessary payments.