The true extent of the mortgage loyalty rip-off has been exposed for the first time, revealing 800,000 borrowers are needlessly paying a premium of £1,000 a year.
The financial watchdog yesterday announced that homeowners who failed to shop around on their mortgage were potentially missing out on huge savings.
Analysis by Money Mail reveals some borrowers can save up to £3,000 a year.
The financial watchdog yesterday announced that homeowners who failed to shop around on their mortgage were potentially missing out on huge savings
Lenders lure new customers with low interest rates offered in the first two or five years of a mortgage.
But at the end of the period these introductory rates are then hiked to the bank’s standard variable rate, and monthly payments can rocket by hundreds of pounds if the homeowner does not switch again.
Of the big six High Street banks, Santander’s standard variable rate is the highest at 4.99 per cent, meaning a loyal borrower with a mortgage of £150,000 would pay £876 a month, or £21,024 over the next two years.
By comparison, if that customer remortgaged to the Skipton Building Society, with a 40 per cent deposit, they could lock into a two-year fixed rate of 1.44 per cent costing £596 a month; a huge monthly saving of £280.
‘Prisoners’ to be freed
Around 150,000 ‘mortgage prisoners’ will soon be allowed to swap crippling deals for cheaper loans.
The City watchdog yesterday revealed plans to loosen strict lending rules introduced after the financial crisis to allow borrowers stuck with their provider to switch to a better rate.
Customers won’t be able to borrow more and must not have missed any mortgage payments in the past year.
Banks and building societies do not have to offer mortgage prisoners a new deal, but more than 65 lenders covering 95 per cent of the market have agreed to adopt the rules.
Nicky Morgan MP, chair of the Treasury Committee, says: ‘This will not be a panacea for mortgage prisoners who are in arrears, or are regarded as ‘risky’ for other reasons.’
Over a year, you would save £3,360.
And over the two years the deal would cost you £15,299 — an enormous saving of £5,725 after taking into account the building society’s £995 arrangement fee.
Borrowers with smaller deposits can also make big savings. With a 10 per cent deposit, you can remortgage to Barclays at 1.78 per cent fixed for two years.
The monthly repayments on a £150,000 mortgage with the bank would work out at £620. Over two years, the total cost of the mortgage, including a £999 fee, would be £15,879 — saving you £5,145 when compared with Santander’s deal.
Santander says it writes to new borrowers four months before their deals expire to let them know they can move to a new one.
The extent to which borrowers are ripped off by staying loyal to their lender was revealed in an investigation by City watchdog, the Financial Conduct Authority (FCA).
It found around a quarter of borrowers failed to switch to a new deal within six months of moving to their bank’s default rate.
And 70 per cent of those who failed to switch to a new deal stayed on that costly rate for five years.
A survey carried out by consumer group Citizens Advice in 2017 found almost 40 per cent of borrowers did not know their interest rate would shoot up if they did not switch to a new deal when it ended.
Gillian Guy, chief executive of Citizens Advice, says: ‘Hundreds of thousands of people are still paying over the odds simply for being loyal to their provider.
‘The FCA says it is doing more research to work out why customers are not switching, but urgent action is needed now. While the watchdog drags its feet, loyal mortgage customers are being penalised a staggering £1.4 million every day.’
A survey carried out by consumer group Citizens Advice found almost 40% of borrowers did not know their interest rate would shoot up if they did not switch to a new deal when it ended
Some mortgage lenders write to borrowers to let them know their introductory deal is about to end and they are free to switch to a new deal. But not all borrowers act on the letters.
Some homeowners, says Citizens Advice, do not believe the saving will be great enough to warrant the effort of switching.
Others, who may be suffering from mental health conditions or see the mortgage market as too complicated, know they are being ripped off but cannot face the hassle of moving to a new lender.
Citizens Advice wants a price cap to be applied to lenders’ standard variable rates to protect homeowners from the huge jump in monthly payments when their introductory interest rate ends.
So how can you start saving thousands?
Start by finding a mortgage broker. You can search for an expert online, using sites such as unbiased.co.uk, vouchedfor.co.uk or mylocal adviser.co.uk or use a national mortgage firm such as L&C Mortgages or Coreco.
It is important to ask your mortgage broker if they are independent and can search for the best mortgage deal across the whole market. Some firms only search deals from a handful of lenders.
When they give you a quote, be sure to ask if you can get a cheaper mortgage rate by going to the lender directly yourself, instead of through a broker.
Some banks offer special rates if you go to them directly. Ask the broker if they offer a follow-up service where they contact you before the deal expires with suggestions of the best rates for you to switch to.
If you choose to do your own research, you can use comparison websites such as Compare the Market or Moneysupermarket.com, but you will not benefit from a broker’s advice on why one mortgage may be more suitable for you than another.