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Borrower ‘loyalty is penalised rather than rewarded’ – analysis

  • 27/01/2020
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Borrower ‘loyalty is penalised rather than rewarded’ – analysis
Legislation may be the answer to tackling the ‘loyalty penalty’ which sees borrowers who do not switch deals pay more for their mortgages, brokers have argued.


They also suggested the regulator needs to up its game, although there was some sympathy that it might be better employed tackling criminal and other similar threats.

Last week the Competition and Markets Authority (CMA) urged the Financial Conduct Authority (FCA) to set a concrete timetable for tackling the mortgage loyalty penalty.

In an update report, it noted that the regulator had completed its research work on why people do not switch deals, adding: “We therefore encourage the FCA to set out a timetable, similar to the one for cash savings, for this work and for implementing remedies that help or protect these consumers, if needed.”


Communication not working

Daniel Hegarty (pictured), chief executive officer at Habito, noted that his firm’s own research had found nearly two-thirds of people do not read their mortgage contract to the end, so may be unaware that the onus is on them to switch to a new deal before moving to the standard variable rate (SVR).

He added: “While many banks and brokers do retention communications, it’s clearly not working for the estimated 800,000 people who are currently on their SVR and likely to benefit from switching their deal, to the tune of £1,000 a year.”

Hegarty pointed to the situation in Ireland, where there is mandatory communication from all lenders to mortgage customers about switching deals, and suggested that a similar system should be in place in the UK.

“I think this absolutely needs the regulator’s involvement. As is so often the case in traditional financial services, loyalty is penalised rather than rewarded,” he continued.

“The longer you stay with the status quo, the more you pay. People deserve better than that – they need the right information about their mortgage, given at the right time, to make the right choice on what’s best for them,” he concluded.


Not getting policymakers’ attention

Miles Robinson, head of mortgages at Trussle, said the loyalty penalty should be a priority for the government, regulator and industry at large, adding that “owning your home should mean stability and freedom, but getting a mortgage brings anxiety, stress and unequal treatment”.

He continued: “Parliamentary attention and FCA intervention to the issue is welcome but we need to expand our ambitions. Mortgages are the largest source of debt for households in the UK, but the scale of the issue is not receiving the attention it deserves from policymakers.”

He suggested this could be in the form of a ‘mortgage reform bill’ which forced lenders to commit to greater transparency and addressing the higher charges for long-standing customers.


Route out of the quagmire

Andy Wilson, founder of Andy Wilson Financial Services, said the mortgage prisoner issue was one close to his own heart, as his daughter and son-in-law are currently trapped on an old Northern Rock ‘Together’ deal they took out in 2007 on an interest-only basis.

Since then they have never felt financially able to switch to a capital and interest repayment deal, and while they have built up equity, they are unable to remortgage due to having lower provable incomes than when they initially took out the mortgage, with his son-in-law having recently started his own business.

“An option for a product switch at a lower interest rate would mean they could start to pay capital, but stuck on the current mortgage rate of 4.79 per cent this is not possible,” he continued.

“The government cannot force the current asset holders ‒ who are about to change once again ‒ to vary the terms of the mortgage and reduce the rate or offer product switching. My children are simply hoping the second year’s accounts for my son-in-law’s business will be enough to let me arrange a remortgage to get them out of this quagmire.”


Don’t blame lenders for borrower apathy

However, Martin Stewart, director of The Money Group, said the FCA was essentially being asked to move its focus away from being a regulator and towards instead acting as a consumer champion, and at a time when its attention needs to be on reducing scams and fraud.

Stewart added that there is “a degree of overcharging in almost everything”, but argued that there needs to be a greater focus on personal responsibility.

He continued: “The lenders can’t be held responsible for retrospective changes in legislation or law, or indeed the borrower’s own apathy.

“I am not saying nothing should be done but I would suggest asking an already under-funded and over-stretched resource such as the FCA to pick this up could actually lead to consumers losing more money elsewhere.”


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