In an update on switching in the mortgage market, the regulator said there was “little evidence of significant harm caused by a ‘loyalty penalty’ in the current mortgage market”. It said the sector had a different pricing structure than the general insurance market but if similar practices were to be found or the situation changed materially, it would consider action.
The FCA said: “We are not complacent and want to continue to encourage those that might benefit from switching to do so. We will also continue to work with lenders to ensure they treat all customers fairly, focusing on those who are in financial difficulty or cannot otherwise switch, particularly given the potential risks from the rising cost of living.”
It said lenders should refer to the Dear CEO letter urging them to support those struggling financially and consider making a start on the implementation of incoming Consumer Duty rules.
The regulator will continue to track the number of borrowers who are not switching when it could save them money and consider the impact of legacy mortgage products being replaced by more expensive ones in a rising rate environment. It will also engage with the industry on what can be done to encourage mortgage borrowers to think about switching when it is cost-effective to do so.
Half of mortgages on fixed rates to expire in two years
The FCA’s most recent analysis from the second half of 2021 found that 74 per cent – or 6.3 million mortgages – are on fixed rates and typically fixed for between two to five years. Of the 2.2 million mortgages on variable rates, around half are on discounted or tracker rates, while the remainder are on reversion rates.
The number of mortgage borrowers who are not switching when it can save them money has declined since 2016.
The FCA estimates that around 370,000, equivalent to four per cent of mortgage borrowers, could save £1,240 a year for two years by switching to a two-year fixed rate with their existing lender. This is an improvement from 2016, when the regulator’s research showed that 800,000, or a tenth of mortgage borrowers, could save £1,000 per year for two years and £100 a year thereafter by switching to a two-year fix.
However, not all savings will be equal. Around 110,000 borrowers will save less than £500 a year for two years, and an equivalent number will save between £500 and £1,000 over the same period. Some 150,000 will save over £1,000 a year for two years.
A further 150,000 borrowers are near the end of their mortgage term and 70,000 are in payment shortfall.
Around half of the mortgages currently on fixed rates are set to expire in the next two years.
Furthermore, 190,000 borrowers who are on a reversion rate and able to switch will not save money.
Not enough data was available to determine whether an additional 220,000 mortgage holders could save money by switching.
Switching behaviour
There can be various reasons why a mortgage borrower has not switched onto a new rate, the regulator noted.
Firstly, some borrowers are paying relatively low rates for their loan and personal characteristics, and would not save money by switching. Those with large mortgages could save by switching while others, such as those with a repayment mortgage nearing the end of its term would save less on average.
The median saving for the 370,000 who would save money is £810 per year, meaning half would save less while the other half would save more.
Some borrowers may choose not to switch because staying on a reversion rate suits their needs, for example if they plan to move or expect another life event where they would want to pay off their mortgage without penalty charges. These borrowers may not see the value in the potential savings to be made by switching over the flexibility to repay without penalty.
Also, some are unable to switch because they are in financial difficulty while others may be with a firm that does not offer new deals, such as mortgage prisoners.
Finally, borrowers with a repayment mortgage with a term of less than 24 months remaining or a balance of less than £10,000 cannot usually switch to a new deal but the financial benefits would be small even if they could.
