Strong competition among lenders means mortgage rates remain attractively low. However, one consequence is that borrowers who remain on their lender’s standard variable rate (SVR) after their deal has ended are paying the price.
The Citizens Advice Bureau (CAB) has dubbed the extra paid by borrowers on SVRs as ‘the loyalty penalty’: the difference between the amount a customer on an SVR pays, and what they would pay as a new customer or if they remortgaged.
In its ‘Exploring the loyalty penalty in the mortgage market’ report, the consumer group analyses the two and five-year fixed-rate deals on offer from the top six lenders and compares them with their SVRs. The average person on an SVR has £60,000 outstanding on their mortgage and 10 years left on the term.
The research shows how much extra these borrowers on the top six lenders’ SVRs are paying, with a top penalty of £702 for those who are borrowing from Nationwide.
The gap between SVRs and other deals has widened from one percentage point in 2010 to three percentage points in the current low-rate environment due to fixed-rate deals falling while SVRs remain the same or even increase.
It estimates that around 21 per cent of mortgage borrowers are on their lenders’ SVRs, of which four fifths – or 1.2m borrowers – are paying the loyalty penalty and would be better off switching to a new deal.
Part of the problem is that once these borrowers move onto SVRs, they often stay on them. The survey showed that 53 per cent of respondents had been on these deals for more than 10 years.
Who stays?
The research also highlighted specific types of borrowers who remained on SVRs, and three types were identified: older borrowers, the less well educated, and those who are on a lower income.
Clearly, some could not switch deals because they were “mortgage prisoners”, which the researchers defined as borrowers stuck on their current deal who had kept up with their mortgage payments, but had been refused a cheaper deal by lenders due to the stricter criteria introduced in 2014.
The complexity of the market is also a factor, researchers argue, as consumers do not always understand the real cost of remaining on an SVR.
They suggest that the percentage of borrowers on SVRs may be even higher than 21 per cent, as not all of the respondents appeared to be even aware that they were on such a rate.
Remedy
So what’s the remedy? The report wants the FCA to require lenders to provide “clear, upfront and standardised information” about their SVRs before a new mortgage agreement, or when they are informing customers of a rate rise.
It also wants lenders to be required to contact borrowers on SVRs on a regular basis to inform them of the benefits of switching to a new deal.
Another suggestion is that the term ‘standard variable rate’ should be scrapped and replaced with a term such as ‘expired rate’, which more clearly communicates the altered nature of the contract.
When responding to the findings, some lenders and brokers pointed to inertia and apathy among borrowers. Lenders should do all they can to ensure borrowers are not disadvantaged, but borrowers also have a responsibility.
One broker pointed out that while interest rates remain low many borrowers are complacent even if they are on a more expensive SVR. It is once the UK begins to teeter on the edge of a rise in the base rate that borrowers are likely to begin to think about taking action and moving to a new deal.
But by that time it will be too late, and many of the most attractive deals will likely have been withdrawn in anticipation of the rate rise.
