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More than 140,000 homeowners are paying a “procrastination penalty” of hundreds of pounds for not fixing a new mortgage deal in time to avoid their lender’s most expensive rate.
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With the era of low interest rates coming to an end, it is more important than ever to take advantage of some of the cheapest loans on record, experts say. The Bank of England’s monetary policy committee held the base rate at 0.5 per cent on Thursday, but an upward move is expected later in the year.
Analysis for Times Money by the online mortgage broker Dynamo suggests that a third of borrowers whose deals expired last year (142,164 out of 430,800) spent an average of 42 days on their lender’s standard variable rate (SVR). It meant they each paid an average “procrastination penalty” of £371 more than they would have on a new deal — £53.3 million altogether.
They paid average interest of 4.73 per cent compared with two-year fixed rates that can be as low as 1.36 per cent.
A couple living in a £500,000 house with a £350,000, 25-year mortgage, who were moved on to the 4.73 per cent SVR would pay £418 a month, or £5,012 a year, more than if they were on the average two-year fixed rate of 2.52 per cent.
[post_ads]Andrew Hagger of Money Comms, an advice site, wants the Financial Conduct Authority (FCA), the industry watchdog, to introduce a mandatory mortgage alarm system, which would force lenders to remind customers four months before their mortgage expires that they need to start negotiating a renewal. “Educating customers that they should start shopping around for a replacement mortgage three or four months ahead of expiry doesn’t seem to be working, so the introduction of a mortgage alarm will reduce some of this wasted spend on inflated interest,” Mr Hagger says. Lenders have little incentive to do this themselves, he adds. “That extra SVR income just goes towards fattening up [lenders’] profits — hence the need for third parties to intervene.”
Daniel Hegarty, the chief executive of Habito, an online mortgage broker, says there is widespread ignorance about the prospect of rising interest rates. Average two-year fixed rates hit their highest level this week since July 2016.
He says: “Our research shows that more than 40 per cent of British homeowners haven’t switched, or even reviewed, their mortgage in the past five years, so may not be aware of the impact that future rate changes could have on their finances,” he says.
The FCA this week said that three quarters of consumers arranged another mortgage deal within six months of being shunted on to an SVR. It has announced a consultation to explore ways to make it easier for consumers to identify products they qualify for and to take out a new deal.
It also wants to find ways to help 150,000 “mortgage prisoners”, who took out loans before the financial crisis and no longer qualify for a new deal because of stricter mortgage affordability rules. This often applies to the self-employed or those whose personal circumstances have changed. They are stuck on often ruinously expensive SVR tariffs, despite being deemed unable to afford cheaper rates.
Aisling Gray, 35, lives in a £600,000 house in Blackheath, southeast London, with her husband, James, also 35, and their children, Romilly, five, and Jasper, three. The couple were on a two-year Santander fixed-rate mortgage, paying about 1.5 per cent, when they suddenly realised in January that their term was about to expire.
They were moved to Santander’s SVR and had their monthly payments rise from £1,000 a month to £1,300.
“I am an ostrich — I bury my head in the sand,” says Aisling, who works in public relations. “I got a letter from Santander and then another, and I ignored them until the one with the red writing came through and we realised we had left it too late. You know how it is: I have two children, I lead a busy life, I just left the letters on the shelf for too long.”
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The fact that they were suddenly having to pay £300 extra each month meant they had to rush when deciding on a new fixed-rate deal. “We ended up sticking with Santander because, if we had switched provider to a more attractive deal, it would have taken too long and we needed to get off the SVR as quickly as we could. We rushed through it and managed it in less than three weeks. It’s not a mistake I’ll be making again,” she says.
Many people are unaware that you can lock in to a new deal three or four months before your existing one expires. It is also worth trying smaller lenders; building societies or specialist lenders are often more willing to consider unusual cases.
“The larger lenders struggle to exercise much discretion — their operations are simply too big and underwriters are managed and reviewed to strict criteria,” says Mark Harris, the chief executive of SPF Private Clients, a broker.
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