And not a moment too soon. HSBC estimates that one in three homeowners could save up to £4,000 every year by remortgaging from a standard variable rate mortgage (SVR) to a fixed two, three or five year product. Indeed, the Citizens Advice Bureau reported that homeowners are being financially penalised when they are shifted from their cheap introductory rate to an expensive SVR in a form of ‘loyalty trap.’
Yet astonishingly, one in four homeowners remain in the dark about the sizeable benefits of switching their mortgage provider or product, and cumulatively this costs the nation an estimated £29bn every year, HSBC said.
But why is this the case when the financial upside of remortgaging can be so big?
Recent research by YouGov found that around half (47 per cent) of adults are wrongly associating remortgaging with taking on even more debt, needing to do home renovations (7 per cent) or failing to meet existing repayments (5 per cent). The data also revealed that one in five mortgage holders do not think they can save money by changing lender, while 9 per of respondents said they had not changed because the process is too complicated and stressful. Some 5 per cent felt it is too time-consuming. As a result, almost two in five (39 per cent) people with a mortgage have not changed their product in the last five years, with 13 per cent of these never doing so.
Further to this, when the questions were put to parents on Mumsnet about access to financial services, 75 per cent said that trying to arrange meetings or calls to organise personal finances was incredibly difficult, especially if they had children. More than half (53 per cent) had spent hours on hold trying to manage their finances by phone, and a similar proportion (49 per cent) needed to take a child with them to a meeting about their finances, as they had no other option.
The YouGov findings show a shocking lack of awareness by the general public when it comes to the benefits of remortgaging. The fear, and inconvenience - as demonstrated by the Mums-net findings, associated with remortgaging as a painful process is driving people’s’ behaviour to not switch mortgage providers or products.
Key Points
- One in four homeowners remain in the dark about the sizeable benefits of switching their mortgage provider or product.
- The rise in interest rates means homeowners are now paying more in mortgages.
- Online mortgage brokers allow people to remortgage more quickly.
The Bank of England’s rate raise now means that borrowers on a tracker, or variable, rate mortgages have seen their monthly mortgage repayments go up by roughly £20 a month. This does not sound like too much. But adding £240 per year to the already existing average overpayment of £4,000, and we are talking about a substantial household cost. Not only was this the first rise in borrowing costs since 2008, but the Bank of England have assured us that it will not be the last.
Remortgaging
On top of the benefits of saving money, remortgaging will be even more important in a market with fewer home movers. Political uncertainty over the impact of Brexit and a high house-price-to-income ratio prevents homeowners from moving up the ladder. In fact, more and more homeowners are choosing to stay put and improve rather than move.
Figures from Lloyds Bank show that the number of people moving house fell for the first time since 2011 – 354,000 people moved home in 2016, a four per cent fall compared to the previous year.
When you add in all the other extra costs, such as estate agent fees and conveyancing fees, the average cost of moving home has jumped to £11,000. Given these whopping numbers, it is no wonder that many people are opting to remortgage and smarten up their existing home instead.
This is particularly popular in London, where property prices are high and space for new structures is limited; between January 2012 and December 2016, there was a 60 per cent increase in home improvement applications in London. Remortgaging can be the best way to finance these works, particularly over more expensive bank loans.
Getting a mortgage
Before online brokers emerged on the scene in early 2016, getting a mortgage was a painful endeavour. It meant queuing up at a bank, or spending hours on hold to speak to a call centre mortgage broker. Booking a face-to-face appointment with an adviser did not guarantee a smooth transaction either and often commanded a £200-plus fee. The period of time after your application was no better, with drip-feed like progress held up by mountains of paperwork.
From a consumer’s perspective getting a mortgage or remortgage was nothing but stressful. Research shows that 25 per cent of Londoners could not be persuaded to go through the mortgage application process again.
This so called ‘mortgage paralysis’ caused by painful memories of being a first-time buyer, is incredibly costly for consumers and will only become more so with the additional rate hikes predicted for the next few years.
In its present state the mortgage market is failing consumers. It remains confusing, opaque, and as such disadvantages homeowners so that all too often they are left paying significantly more than they need to, or are losing out on their dream properties. Technology has transformed and simplified other aspects of our lives beyond recognition, but the mortgage application process is still little different to what it was 30 years ago.
Open Banking
Technology holds the key to how the mortgage industry works. It gives consumers new tools that make switching a mortgage as easy and commonplace as switching a utilities provider, but with much more significant savings. Also shaking up the status quo is regulatory change, including Open Banking, as well as a new breed of fintech startups such as online brokers.
First, consider this, traditional brokers are affiliated with only a few lending houses and can scan about 10 per cent of the market. Algorithm-based search engines can search over 20,000 products in the market from over 70 lenders and deliver customers the best deal for their circumstances – and in real time.
A digital mortgage adviser (DMA), an artificially intelligent chatbot can combine real-time market mortgage rates with a customer’s current financial situation (for example, employment, salary and personal life plans) to calculate an indicative mortgage and monthly payment.
It recommends what is genuinely the best possible deal for the applicant. Unlike human brokers, the algorithms of digital mortgage advisers have no biases in favour of particular lenders or particular types of borrowers and offer no judgment about borrowers’ circumstances. It provides high-quality mortgage decisions that people can trust.
Online brokers have also harnessed technology in a way which allows customers to get better mortgage deals as and when they become available and applicable, ensuring that they will never pay over the odds.
Second, the way consumers want to engage with their financial service providers in today’s world has shifted significantly.
Consumers want to be able to access advice 24/7, which is at the core of the offering of online mortgage brokers. In fact, most digital mortgage customers have said they prefer live chat to complete and submit their mortgage application, versus a telephone call or face-to-face meeting. Outside of regular working hours, human brokers work weeknights and weekends to ensure consistent service and access when the customer needs it.
Third, the regulation around Open Banking will help to push financial services into the 21st century by allowing consumers to receive more services, get greater product choice and better-priced deals – all aligned to their individual circumstances.
In the case of mortgages, being able to base borrowing calculations and applications on a customer’s personal data set will save them significant money, time and stress. It will ensure that mortgage ‘illustrations’ and decisions in principle, reflect the likely lender decisions from the outset.
Open Banking will be a fantastic innovation for consumers. However, with one in five people in the UK classifying themselves as financially illiterate, it also presents a pressing need to be implemented safely and securely. The consent-based data sharing that Open Banking will bring, will enable many to potentially save thousands per year.
However. correct data management is imperative - low levels of financial literacy, mixed with a new ease of financial information sharing, could put some at risk. As an industry, we need to continue to invest in technology and prioritise safe Open Banking implementation, for the benefit of all consumers.
Fundamentally technological innovation holds the key to a more simple, fair and transparent market and one hopes the Financial Conduct Authority (FCA) will recognise the potential for consumer savings when they publish the findings of their investigation into Britain’s broken mortgage market in the next few months.
If the industry can fully embrace innovation in both the use of technology and product choice, there is a real opportunity to deliver lasting change about the way people think about, apply for, and complete a remortgage and this ultimately will put money back in the nation’s pockets.
Daniel Hegarty is chief executive and founder of Habito
