Exploring the loyalty penalty in the mortgage market
Home ownership is the aspiration of millions of people in the UK. For the vast majority, taking out a mortgage is the only way of achieving this. In 2016, the UK mortgage market included 11.1 million mortgaged properties, £245 billion borrowed, and average monthly repayments of £3,774 million.
While the mortgage market works well for the majority of homeowners, many experience problems when engaging with it. Last year, Citizens Advice advised 4,147 clients on mortgages and secured loans. Our data allows us to spot new pockets of consumer detriment and respond accordingly.
This policy note focuses on one type of detriment - the ‘loyalty penalty’ that mortgage customers pay when they stick with the same deal after their initial fixed rate expires. Citizens Advice is currently examining how providers of essential services frequently charge loyal customers far more than newer customers for the same product. Our analysis of the mortgage market shows:
Around 1.2m borrowers pay a loyalty penalty. As the difference between fixed rates and the Standard Variable Rate (SVR) has grown in recent years, so have the chances of being penalised and the size of the penalty.
An average SVR payer on a 2 year fixed rate mortgage faces a penalty of £439 a year, but 1 in 10 pays over £1,000 a year. It is higher for typical first time buyers, who are penalised by £1,411 per year. The majority (53%) of customers who roll onto an SVR don’t remortgage for more than 10 years.
Older consumers, those on a low income and those with lower education levels are more likely to pay a loyalty penalty. For example, nearly a third (29%) of SVR payers are on a low income compared to less than one in five (19%) of mortgage holders on other types of deals.
People often find the mortgage market far too complex and frequently don't have the time to shop around to get the best deal. A quarter of people who remortgaged said they found it difficult, and 39% of customers say they do not have enough time to do more shopping around.
To promote customer choice and drive competition across the market, the FCA should require lenders to improve the content, timing and format of existing prompts. Providers should also be required to label their standard variable rate in a way that better reflects its nature and to make all mortgage deals available to all eligible customers. Finally, the FCA should assess the impact of mortgage fees on consumer behaviour and monitor detriment to vulnerable customers.