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CAB - Loyal mortgage holders hit with £400 average price hikes

Loyal customers who don’t remortgage after their fixed term deal can pay £400 extra a year, Citizens Advice research reveals.

The penalty affects people who are rolled onto their bank’s standard variable interest rate at the end of a fixed term mortgage deal.

The Citizens Advice research finds that people who remain on the standard rate after a 2 year fixed term mortgage deal face an average loyalty penalty of £439 a year.

The charity calculates that 1.2 million people would be better off if they switched to a new deal - with 1 in 10 paying over £1,000 a year extra by staying on the standard variable rate.

First time buyers, who typically have more debt and more time left on their mortgage, face paying an extra £1,359 a year once their 2 year fixed deal expires.

The national charity also reveals older and poorer mortgage holders are more likely to be hit by a loyalty penalty.

Citizens Advice has 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 found these customers face an average annual loyalty penalty of £439 after 2 year fixed mortgage deals expire.

Name of provider

Standard variable interest rate

Interest rate on a 2-year fixed deal for typical SVR payer*

Loyalty penalty for typical SVR payer

Nationwide Building Society

3.74%

1.59%

£702

Santander

4.49%

1.64%

£666

Barclays

3.74%

2.35%

£459

HSBC

3.69%

1.54%

£441

RBS

3.75%

2.59%

£260

Lloyds

3.74%

2.39%

£186

For some people - 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 (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 over half of people (51%) on expired fixed term mortgages wrongly think they pay the same or less than newer customers.  

Citizens Advice has been investigating how much more loyal customers face paying in different industries - such as energy and broadband - than new customers.

Its latest report, ‘Exploring the loyalty penalty in the mortgage market’, highlights 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 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.

Citizens Advice Chief Executive, Gillian Guy, said:

“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. 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.

“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.”

Report: Exploring the loyalty penalty in the mortgage market

Notes to editors

  1. The number of mortgage holders paying a loyalty penalty is calculated using mortgage data from the Bank of England/NMG survey 2016. This is a representative survey of 1,829 mortgage holders and provides information on respondents’ mortgage type, size, monthly repayments and interest rate. Citizens Advice used this data to define a ‘typical’ standard variable rate customer.  Citizens Advice then took average interest rates from the 6 largest mortgage providers (weighted by market share) and for a ‘typical’ SVR customer and applied them to all SVR payers in the survey sample to work out the proportion affected by a loyalty penalty.
  2. Citizens Advice defines the ‘typical’ standard variable rate payer as having median monthly repayments of £651, with £60,000 left to pay on their mortgage over nearly 10 years.
  3. Citizens Advice also carried out a mystery shopping exercise for a ‘typical’ SVR customer to work out how much less they could be paying a year if they were on the 6 biggest mortgage providers best available fixed rate deals. A Citizens Advice researcher used the lowest interest rates available for 2 and 5 year fixed deals on the websites of the 6 providers, advertised on websites on 8 May 2017.
  4. The definition of a first time buyer is based on the UK’s average house price of £219,000, assuming a 25-year mortgage term and a 20% deposit.
  5. The calculation takes into account fees charged by the six mortgage providers (on May 8, 2017) for remortgaging. These have been subtracted from the yearly loyalty penalty.
  6. Information on consumer switching behaviour and attitudes in the mortgage market taken from the European Commission Consumer Market Scoreboard 2016.
  7. Citizens Advice is made up of a network of over 300 independent local charities across England and Wales, the Citizens Advice consumer service and the national charity Citizens Advice. We help people with everything from money issues or problems at work to housing or consumer rights.
  8. Citizens Advice is here for everyone and provides free, confidential and independent advice to help people overcome their problems. We are a voice for the people we help and consumers and advocate on the issues that matter to them.
  9. To find your nearest Citizens Advice in England and Wales or to get advice online, go to citizensadvice.org.uk
  10. You can get consumer advice from the Citizens Advice consumer service on 03454 04 05 06 or 03454 04 05 05 for Welsh language speakers.
  11. Last year we helped over 2.7 million people face to face, by phone, email or webchat.
  12. Citizens Advice services are provided by 23,000 trained volunteers and 7,200 paid staff in 2,900 locations across England and Wales and people visited our online advice pages 36 million times.
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