Around 30 per cent of borrowers pay on average £550 more for their mortgage deal than they need to, according to the first findings of an FCA study examining competition in the mortgage market.
As a result, the regulator has called for better information and tools to enable both borrowers and intermediaries to make the right product choices. The report also highlights borrowers who remain on their lenders’ reversion rates after their mortgage deal has ended – to their financial detriment.
Despite these negative findings, the study – designed to understand how well the market is working since the implementation of the Mortgage Market Review (MMR) – draws largely positive conclusions from its examination of the sector. It points to a wide range of products and competition, and high levels of consumer engagement.
The FCA found most mortgage borrowers do some initial research to work out both how much they could borrow and the monthly cost. However, 45 per cent use only one source of information, and 22 per cent fail to compare products from two or more lenders because of the loyalty or trust they exhibit towards their existing provider.
The regulator suggests that the information and tools currently available are of limited use in helping consumers make effective decisions, as there is no simple way for them to identify upfront the products for which they qualify. The tools are most suited to financially capable consumers with straightforward, low-risk circumstances.
It adds that even intermediaries are hampered by a lack of information. It claims most are reliant on their past experience and lenders’ own tools to search for products, making it harder to identify suitable products that are less expensive.
While the watchdog welcomes the fact that most borrowers are routinely channelled towards advice, it says this has a minimal impact on borrowing costs, suggesting some borrowers receive advice they may not need. It found that most mortgage recommendations post-MMR are suitable, and that firms have implemented the responsible lending rules.
Nevertheless, it is concerned that many borrowers are paying more for a mortgage than is necessary, either because they miss out on cheaper, suitable deals or because they remain on their lender’s reversion rate at the end of their mortgage deal.
In its research, the FCA found that more than three quarters of borrowers switch deals within six months of moving to a reversion rate, which suggests that the market works well for many.
However, it notes that as of June 2016, 2m out of 8m residential mortgage borrowers had been on a reversion rate for six months or more. Of those, around 800,000 would have benefited from switching, saving an average of £83 a month. It identified only around 30,000 who could be described as mortgage prisoners – borrowers who would benefit from switching, but cannot despite being up to date with their payments.
Chart 1 provides a breakdown of the figures. The number of ‘prisoners’ is low, according to the FCA, because most lenders say they do not carry out any new credit or affordability checks on existing customers applying for a new deal.