Adults across the country sign financial contracts without fully reading or understanding them, research from online mortgage broker Habito has found.
Three quarters of homeowners admit to not fully reading financial contracts before signing them, while one in four said that they have committed to a financial agreement without understanding the language used in it.
More than half adults think they have overpaid for something because the language in the contract was unnecessarily complicated.
One in three admit they signed up to their mortgage without finishing reading the terms, while nearly half only read up to a quarter of the way through a mortgage contract before signing it.
More than half of mortgage holders in the UK are put off switching their mortgage because of the over-complicated language and small print used in the contracts.
Challenging the industry to clean up its act, Habito has partnered with specialist linguistic and economics experts to reveal that complex mortgage contracts are doing a costly disservice to those who should switch more often by up to £15.5bn.
Dominik Lipnicki, director at Your Mortgage Decisions, told Mortgage Solutions: “Clearly there are many challenges as financial contracts have terms and conditions, which are not always easily explained but all too often they are provided on bland black and white pages which may seem daunting to anyone outside of the industry. These percentages speak for themselves, clearly more could be done to provide clients with an easy to understand guide. I would however say that a good mortgage adviser will always explain the product provided in the required detail. Including its limitations as well as advantages.”
David Hollingworth, associate director communications at L&C Mortgages, said: “It’s important that the industry strives to make all literature as easy for customers to understand as possible, despite what can be a very technical area.
“There is a difference though between simplification of terms and customers taking the time to read the information. The drive to provide as much detail as possible can run the risk of overwhelming customers. Brokers of course provide an important role in helping their customers understand the key elements of their mortgage more clearly but borrowers should still get into the detail of such a major transaction.”
The University of Nottingham’s Linguistic Profiling for Professionals department found that the educational reading age needed to fully understand the language used in mortgage contracts is Year 13 (A-level), which almost 50% of the UK adult population do not have.
Additionally, research by Peter Backus, senior lecturer in Economics at the University of Manchester, revealed that households with a GCSE reading level are staying on costly deals up to twelve months longer than those with a higher-level education. This is despite the fact that the potential savings from switching could make a huge difference relative to income.
Backus said: “Following the analysis of a significant number of live mortgage deals, my research shows that 55% of mortgage holders could reduce their monthly mortgage payment.
“From my research, the average mortgage holder is able to save up to £294 a month by switching to a new mortgage. As a percentage of their current monthly mortgage payment, it is households with an educational reading age of Year 11 (GCSE) or below who would benefit from switching the most.
“For an investment as important as a mortgage, often the biggest financial commitment a person will ever make, the readability of the agreement itself is crucial, which is why I welcome Habito’s ‘free from’ approach and urge the industry to follow their lead.”
Language should be simplified
Consumer appetite for change is clear with the research results showing that 90% of those surveyed believe the language used in contracts could be simplified. On the other hand, one in three mortgage holders said they only read up to a quarter of the way through their contract because they were confused by the language it contained.
Further, 46% mortgage holders say that it’s the language, including complex wording, acronyms and industry jargon, used in financial contracts that is the most stressful part of signing, followed by the length of time it takes to read and understand the contract with 31%.
Almost two thirds of those questioned said that making the language in contracts simpler would ease their stress levels. More than a third admit that the stress of trying to understand a financial contract had led to sleepless nights and being distracted throughout the day. One in ten have taken time off work to go over a contract because the language used is too complex.
Daniel Hegarty, founder and CEO of Habito, said: “Taking inspiration from the food industry, Habito is making itself a “free from” mortgage broker. For us, this means being free from confusing language, industry jargon and ropey customer communications. It is about being upfront and clear with customers by using terms they understand and explaining much better the ones they don’t.
“We feel this should be an industry standard. The fact that almost everyone wants regulation to force contracts to be easier to understand is hugely telling of the scale of the problem, and we plan to campaign for that to happen.”