Citizens Advice has claimed that mortgage customers who don’t remortgage after their fixed term deal can pay £400 extra a year for being ‘loyal’.
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 two-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 one 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 two-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 two-year fixed mortgage deals expire.
Name of provider | Standard variable interest rate | Interest rate on a two-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 51% on expired fixed term mortgages wrongly think they pay the same or less than newer customers.
Citizens Advice’s 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 (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.
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.”
Ishaan Malhi, CEO of online mortgage broker Trussle, added: “It’s hugely refreshing to see a credible and trusted consumer group like Citizens Advice turning its attention to the mortgage sector, more specifically, to the millions of mortgage borrowers getting an unfair deal because they stick with one lender.
“While most mortgage borrowers understand that they need to consider switching when their initial fixed period comes to an end, so many are failing to do so. From our own research, we’ve found that there are a number of causes of this inertia, which the industry could address collectively. This is why we’re also calling for industry action in the shape of a Mortgage Switch Guarantee, mirroring the consumer benefits recently implemented in the energy and current account markets.
“Looking at the report, we agree that lenders need to nudge their customers into action more often and that 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.”
