Millions of homeowners end up on their lender's default rate - which is usually much higher than if they switched By Sally Hamilton For The M
- Millions of homeowners end up on their lender’s default rate – which is usually much higher than if they switched
Millions of homeowners are throwing away as much as £5,000 a year in mortgage interest payments by failing to switch to a cheaper deal – with many borrowers blaming their apathy on a nightmare experience when obtaining the initial loan.
Most took out a cheap fixed, tracker or discounted loan, but then failed to move to another low rate at the end of their special deal. This means they are now languishing on their lender’s standard variable rate – the default rate that is usually far higher.
Research by online mortgage broker Trussle indicates that two thirds of borrowers have nimbly switched energy supplier with a typical saving of £200 a year. But just one in three has transferred a home loan, which can save far more money.
Mortgages: Millions of homeowners fail to move to a new low rate at the end of their deal
Ishaan Malhi, founder of Trussle, says: ‘Two million borrowers are paying thousands of pounds more than they need to every year, and face an inertia tax of £408 for every month they delay remortgaging.’
The average standard variable rate is 4.8 per cent, while two-year fixes are available at just 1 per cent. On the average £131,000 mortgage this means paying £4,920 more a year.
The only advantage of being on one of these default rates is there are no early redemption penalties – so no excuses for staying put.
Some standard variable rates are not excessive. First Direct charged on average 3.69 per cent, Barclays 3.71 per cent, and HSBC and Nationwide Building Society both 3.75 per cent from August 2016 to January 2017. But some regional lenders charge far more. Kent Reliance and Newcastle and Marsden building societies charged 5.87, 5.99 and 5.8 per cent respectively over the same period.
The more equity borrowers have in a property the more options they have for switching. The best deals are normally open to those with equity of at least 20 per cent. Find the best deals either by using a mortgage broker (find one at unbiased.org.uk) or a comparison website.
Online mortgage broker Dwell last week launched a calculator (universalmortgagecalculator.com) to highlight the lender willing to lend the most money based on eligibility as well as affordability. The calculator shows that the amount that can be borrowed will vary by as much as £150,000, depending on the lender.
CAUSE OF APATHY
More than one in ten borrowers surveyed by Trussle said the stress of their first loan application made them reluctant to tackle the process again. Jargon and a dearth of information contributed to their lethargy. But a lack of timely communication from lenders was also to blame.
Malhi says: ‘Our research shows people want more alerts towards the end of their special rate period so they can prepare to switch. Many lenders do this, but it tends to be just one letter in the post.’
Trapped! But mortgage prisoners can break free
Tips: David Hollingworth says lots of us can remortgage
While apathy deters many homeowners from switching to a better deal, a million borrowers are trapped in standard variable rate mortgages because of a change in lending rules. Regulations introduced in April 2014 make it tough for them to pass strict financial stress tests that let them take out a new loan.
These tests include proving they could cope if rates leapt by 4 percentage points. Lenders also now study spending patterns, including how much borrowers spend on entertainment, holidays, childcare and commuting.
Borrowers can stumble if their circumstances have changed since the first loan application.
David Hollingworth of broker London & Country Mortgages says changes such as lower income, increased childcare costs or going self-employed can thwart attempts to remortgage.
But he adds: ‘The key is that lenders have different attitudes. For example, NatWest is more flexible over childcare costs than some other lenders.’
ACTION PLAN FOR ESCAPE
MENTION to lenders any free childcare received – such as from grandparents – if such costs are likely to be scrutinised. This is helpful where lenders otherwise make exaggerated assumptions about the size of childcare bills.
TRY your current lender. Many take a softer line with customers on their books. At Nationwide Building Society, for example, existing borrowers can switch loans without new affordability checks as long as they do not increase the sum borrowed. They are also given a 0.1 percentage point discount on the new loan rate, as well as £100 cashback.
COMPARE deals elsewhere. While a current lender may be the first port of call for a trapped borrower, do not make it the last.
TAKE CONTROL of unsecured debts such as outstanding credit card balances or personal loans. Hollingworth says: ‘Many people are in a position to pay off these debts but do not see it as a priority.’
CUT OUT unwanted direct debits. If you pay to belong to a gym but never get there, or have a subscription to a magazine that stays in its plastic wrapping, then cancel and free up the cash to improve your balance sheet.