Loyalty can cost mortgage holders £400 a year, warns Citizens Advice
The charity calculated that 1.2 million people would be better off if they switched to a new deal.
Loyal bank customers who do not remortgage after their fixed term deal comes to an end can end up paying an average extra £400 a year, according to a study.
Citizens Advice said homeowners who are rolled onto their bank’s standard variable interest rate (SVR) at the end of a two year fixed term mortgage deal, and remain there, face an average “loyalty penalty” of £439 a year.
The charity calculated that 1.2 million people would be better off if they switched to a new deal, with one in 10 paying more than £1,000 a year extra by staying on the SVR.
Interest-only mortgage payers: sitting on a time-bomb? https://t.co/kwHVyhVkfM— ReigateBansteadCAB (@ReigateandBCAB) July 27, 2017
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 advisory service also found older and poorer mortgage holders are more likely to be hit by a loyalty penalty.
It compared the interest rates of the UK’s six largest mortgage providers to find out how much a typical SVR customer could save by switching to each provider’s cheapest fixed term offer, calculating that 83% of people would be better off if they switched to a new deal.
However, it also found low awareness of the problem, with 51% of those on expired fixed term mortgages wrongly thinking they pay the same or less than newer customers.
Press release: Lloyds Banking Group sets up redress scheme for mortgage arrears customers https://t.co/xDCx3I4Qgc— FCA (@TheFCA) July 27, 2017
The charity 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, for example by replacing “standard variable rate” with “expired rate”.
Citizens Advice chief executive Gillian Guy said: “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.”