Home owners in the UK who don’t remortgage after their fixed term deal can end up paying an average of £400 extra a year, with many not realising they could save money by switching.
New research from charity Citizens Advice also reveals that first time buyers, who typically have more time left on their mortgages, can end up paying an extra £1,359 a year after their typical two year deal finishes.
The extra payments comes a result of mortgagees being automatically put onto their lender’s
standard variable interest rate at the end of a fixed term mortgage deal rather than looking around for a better product.
The Citizens Advice research finds that people who remain on the standard rate after a two year fixed term mortgage deal face an average loyalty penalty of £439 a year and it calculates that 1.2 million people would be better off if they switched to a new deal.
Overall one in 10 end up paying over £1,000 a year extra by staying on the standard variable rate and the research also reveals that older and poorer mortgage holders are more likely to be hit by a loyalty penalty.
The analysis compared the interest rates of the UK’s six largest mortgage providers to find out how much a typical standard variable rate (SVR) customer could save by switching to each provider’s cheapest fixed term deal.
It gives examples with the Nationwide Building Society having the biggest SVR ‘penalty’ at £702, followed by Santander at £666, Barclays at £459, HSBC at £441, The Royal Bank of Scotland at £260 and Lloyds at £186.
The report points out that for some people, mainly those who have less left to pay on their mortgage, it might be cheaper to remain on the standard variable rate, rather than pay fees to take out a new mortgage.
But Citizens Advice calculates that 83% of people currently on a standard variable rate, that is around 1.2 million, would be better off if they switched to a new deal.
The charity’s report also finds low awareness of the problem with 51% of those on expired fixed term mortgages wrongly thinking that they pay the same or less than newer customers.
It says that there are problems with how mortgage holders are told about their options when fixed term deals end, with two thirds saying they have never been informed they could save money by switching.
Citizens Advice wants the Financial Conduct Authority (FCA) to make all lenders provide clear information to new and existing customers about how much they could lose by rolling onto a standard variable rate.
It also says the FCA should consider changing the name of the default mortgage rate to help customers better understand the changed nature of the contract, replacing ‘standard variable rate’ with ‘expired rate’, for example.
‘More than a million loyal mortgage customers are being stung with higher interest charges when their fixed deals end. 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,’ said Citizens Advice chief executive Gillian Guy.
‘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,’ she pointed out.
‘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,’ she added.
Ishaan Malhi, chief executive officer of online mortgage broker Trussle, said that even when people know that they can switch mortgage provider when their fixed period comes to an end, they do not always do so.
He believes there should be some kind of Mortgage Switch Guarantee, mirroring the consumer benefits recently implemented in the energy and current account markets and that lenders need to nudge their customers into action more often.
‘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,’ he added.
Mortgages – Find cheapest rates from 0.98%