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Millions Overpaying on Mortgages -The Cost of Complacency?

Written by Rob Killeen on 01 February 2015.

New research by Capital Fortune indicates that millions of borrowers may be overpaying on their current standard variable mortgages due to complacency. In light of the numerous deals now available, Rob Killeen, Business Manager at Capital Fortune, considers how misguided they may be?

The Bank of England’s base rate has been frozen at a record low of 0.5% for 6 years this March and millions of home owners believe they are cashing in, by sticking with their lender's standard variable rate (SVR)

There is no doubt that borrowers who are coming or have come to the end of their initial rate deal are facing a dilemma when it comes to re-mortgaging. The challenge for them is that many were on higher initial deals and once that rate came to an end, they fell automatically on to the standard variable rate. Monthly payments reduced and psychologically, falling on to a standard variable rate of say 2.5%, 3.99% or 4.74% depending on the lender, they have felt far better paying a slightly lower rate, compared to what they had been used to paying. It is unfortunately there, they have since stayed.

Borrowers should keep two important questions at the forefront of their mind –

1) What rate am I actually paying today?

Once they assess the cost of this rate and the actual monthly commitment they are physically paying a mortgage lender, from their own purse or wallet, they can then turn to the second and further question –

2) Are the total savings available, really worth the time, effort and hassle of re-mortgaging?

Based on our own research, the savings could potentially be formidable.

Research and Interpretation

According to previously published data from HSBC, over 4.4 million mortgage borrowers, representing 39% of the total mortgage market, are on their respective lenders' Standard Variable Rate. (SVR) HSBC have indicated that in December 2012, the average rate paid was 4.86%. More recent research from Moneyfacts has confirmed a similar figure, stating that the average SVR is around 4.8%. In our view, based on today's SVR's across the top 10 UK lenders, chosen on gross lending volumes as of 01/02/2015 (see chart), the previous research may calculate it too high, but we still deem it to be a mouth watering  4.36%.

In contrast, rates start from as low as 1.29% for comparable flexible products, with exactly the same no tie in penalties, allowing you to fix at any time - of course for those who qualify. But with such deals available today, to hundreds of thousands of borrowers, given the enormous potential savings, it does beg the question - Why the complacency? - If that's what it is.

We appreciate that this product may or may not be suitable to your own individual needs and the purpose of this article is not to promote one product or lender over another. It is purely an attempt to provoke consideration of this particular mortgage and hundreds of other products now available, potentially likely to save you money in the marketplace.

The complacency of borrowers to shop around, can perhaps be partly understood by the various media messages espousing how difficult it now is, to secure a competitive mortgage deal.

It may also in part, be understood under the spotlight that all Standard Variable rates give borrowers the flexibility and ability to overpay, change the product or lender at any time, without severe penalty. Many borrowers, known as “the stay-putters” have clearly remained on the SVR, perhaps awaiting rates to rise, before making the switch. In light of rates not changing for nearly 6 years, they have become stagnant.

Interestingly however, if they had made the switch say one, two, three, four or five years ago, they likely could have been paying 2-3% less each year. That is a £2,000 - £3,000 reduction in mortgage interest per annum,  based on just a £100,000 of mortgage.

Over five years, they are likely to have paid unnecessary interest by potentially £10-15,000 and they can double, triple, quadruple that sum, depending on the size of their mortgage, where the mortgage is £200k, £300k or £400k respectively. The figures are staggering and are worth a moment of anyone’s time to at least re-assess the position.

In 2011, Which? in our view was wrongly criticised for pointing out that lender’s had failed to pass on to customers the low cost of borrowing through their standard variable rates. They were subsequently rebuked by the trade body for mortgage providers, the Council of Mortgage Lenders (CML). The CML justified the level of standard variable rates, post credit crunch, stating that the low Bank base rate bore no contrast to the borrowing costs of lenders.

The fact is regardless of whether lenders are paying more than the 0.5% bank base rate to secure the money, they subsequently lend to borrowers, standard variable rates are far from competitive.

It is noted with interest, that more than a fifth of lenders have increased their SVR since the base rate hit an all-time low of 0.5 per cent in March 2009.

Last week, on 29 January 2015, the High Court upheld West Bromwich Building Society’s rate hike on its SVR to buy to let borrowers. The lender had increased its SVR by an additional 2.49% to 3.99%, despite no Bank of England rate increases. The case was brought as a class action by 360 landlords against the lender increasing the cost on 6,700 mortgage deals. The customers failed.

Borrowers should remember the standard variable rate is a rate set at the lender’s discretion. 

Banks and Building Societies have enjoyed increased margins on standard rate mortgages for the last few years and when the base rate rises again, few lenders will likely be able to justify passing the full amount onto their SVR customers. The 'West Brom' ruling, makes it however likley that they will.

Top 10 Lenders SVR’s

The top ten main lenders current standard variable rates are below:

  • Clydesdale 4.95%
  • Coventry /Godiva 4.49%
  • Halifax  3.99%
  • HSBC 3.94%
  • Lloyds 3.99%
  • Nationwide 3.99%
  • Nat West (RBS)   4%
  • Santander 4.74%
  • Virgin Money (Northern Rock) 4.79%
  • Yorkshire Building Society 4.95%

Average SVR as of 1/2/2015 4.36%

At 6.08 per cent, Kent Reliance Building Society has the highest SVR on the market – more than 12 times the base rate. The five other direct lenders with the highest SVRs are all building societies.

It is no wonder that further research by Which? shows that seven in ten people are worried about mortgage rates and two in ten fear repossession.

Case Study

It is a worthy to demonstrate the point by a client case study. We dealt with a typical capital Fortune client last week who has given authority and permission to use his name.

Tony Madigan is a property developer and runs a successful business. He is bright, financially astute and a local entrepreneur, whom over the eyars has built up a small property portfolio. On looking at the first three mortgages within his spreadsheets, one residential and two buy to lets, it was immediately clear he could save in excess of £15,000 per year by simple remortgages. He was overpaying on his residential mortgage by more than £700 per month and feared he could not remortgage because he wanted interest only. This simply wasn't true. He was also overpaying on both Buy to Lets by £300 per month each. In total he was paying a staggering £1,300 per month or £15,600 per year in unnecessary interest. This equated to £31,200 in savings, by committing to new 2 year deals.

Typically, like many borrowers, when faced with the presented information, he was surprised. Like many people, we speak to, he told us that he felt he was already on good rates as the actual rates he was paying had already fallen a few years ago. Like the millions of others, he simply allowed himself to automatically revert to his lender's SVR. These were 3.99% and 4.74% respectively.

Whilst true that his reversion was lower than what he had initially been paying, he had not appreciated, like many, that due to intense competition, rates had fallen even further and he could secure a 1.69% rate on his residential and a 2.64% on both buy to lets. He had been paying significantly greater interest to the Bank than he needed. 

He is not alone out there!

Why do Borrowers stick to the SVR?

This is a question, many lender’s marketing departments seek to ascertain, as the more customers on these higher rates, the more a Bank earns and the higher their profit margin. Some ofhe big 6 Utility providers now make contact with customers advising them if they can save money, (more than £1 a week on average at typical use) with any alternative utility supplier. A similar, true commitment in the mortgage market, to 'Treating Customers Fairly' should surely involve the concept of self reporting too.

There is no doubt that post the credit crunch, it has become more challenging to obtain a new mortgage, but those with a reasonable income, who can afford the monthly payments, remain welcome by most lenders. Yes, the process is more rigorous, but lenders like any other business, simply wish to ascertain payments can be made over the longer term, and rightly, instead of just taking a customer’s word for it, they now need to see full documentary evidence of actual income and expenditure.

This approach brought in by the new Financial Conduct Authority (FCA) is better for customers and to protect the economy, is far better for banks.

Any good broker, can assist you in the process of applying for a mortgage, providing original documents and completeing the paperwork.  Despite media reports to the contrary, the application is not daunting if you are prepared and know exactly what will be needed and what to expect. The market has evolved - but once a broker knows your circumstances, they can offer you a comprehensive list of products from across the market. This usually beats the alternative of going to view the products of just one Bank.

There is no doubt, that fixed-rate and tracker mortgages are at their cheapest level in 25 years, and those on any Standard Variable Rate, should look at the rfull range of products now available.

What Is Available?

As indicated, one of the cheapest rates on the market, with no tie-in, just like your standard variable rate is currently 1.29% for 2 years. This product offers free legals and a free valuation for all remortgages. There are no penalties to change product or lender.

The devil can be in the detail and whilst the rate does come with a £995 set up fee, it does show, that even with the set up costs, the vast majority of borrowers are likely to be significantly overpaying on their current SVR mortgage on any true comparison.

Furthermore, the lender without penalty, allows you to fix onto any of its nationally available deals. These are currently 1.49% for a 2 year fixed, 2.29% for 3 years, 2.79% for 5 years and 2.99% for a 10 year fixed rate deal.

There is not just this product. There are a number to choose from and a range of lenders are offering competive deals.

There are literally thousands of products and rates available and you will need of course to meet criteria and qualify. You will also need to both demonstrate and be advised that the mortgage is affordable and the product is suitable. Importantly, you will need to be taken through all the hidden small print to ensure there are no catches or hidden costs. An FCA regulated mortgage adviser is both proficient and able to guide you in this exercise. Furthermore, they are accountable and liable for their oral and written advice.

Mortgage advice, will confirm the potential savings for any borrower.

Switch Now or Wait To Fix?

For most borrowers, the choice of whether or not to fix, and for how long, depends on future interest rates and the level of risk that is acceptable to you. The design of products like the track and fix product mentioned above, may mitigate many of these risks and for some, may provide a solution to the understandable dilemma of timing.

Typically people tell us they remain unsure whether to switch now or fix later!

The paradox however, is that few people are on rates so low, making the "to fix or not to fix" question so hard to answer. They are usually sitting on high SVR's with one of the major banks or building societies and can secure the same levels of flexibility they currently enjoy, but at far lower costs. This is becoming and industry as well as a customer dilemma.

The purpose of this article is not to consider our own services, but rather for readers, to set up a conversation with a professional mortgage adviser, whom you can trust and one that can properly give you the guidance you deserve. The implications of doing nothing as we suggest,are likley to be significant.

The SVRs of most lenders range from 3pc to 6pc, so whether it is worth switching will depend on your existing deal. Remember too that many of the low SVRs have been replaced.

For example, Nationwide's standard rate for pre- April 2009 customers is 2.5%, yet for those who joined after that date it is 3.99%. It is therefore essential to pull out your mortgage documentation and see exactly how much you are paying?

For those who have a small deposit or little equity, mortgages have always been more expensive, but rates are also improving at higher loan to values.

It remains the case that borrowers with at least 25% equity or more will have the pick of the deals. However, there remain products, which are still lower than most lenders SVR's, for those with as little as 10% equity. One such lender is offering a current two year discounted product at 2.48% for 90% borrowers. 

It’s well worth shopping around, whatever the equity.

The Silent Prisoners

We appreciate that not everyone is able to re-mortgage and the term “mortgage prisoner” has been conjured to refer to the 3  million ‘silent prisoners’ of the credit crunch.

These borrowers account for 27% of mortgage holders whom have become stuck with their current mortgage, unable to move home or shop around for a better deal.

Some have been trapped by negative or insufficient equity while others have faced worsened financial circumstances such as unemployment or found tightened lending conditions – including the recent Mortgage Market Review, with its correct, stronger, emphasis on the long term affordability of mortgages, unfortunately prevents them accessing affordable mortgage finance.

The FCA have introduced mortgage 'transitional provisions' to assist these borrowers and have offered guidance to lenders to prevent trapped borrowers,  remaining on high standard rates and overpaying.

There is growing evidence however, across the market, that a number of lenders are not following or misinterpreting the 'transitional' guidance and we anticipate some further assistance being provided by the Regulator, to these customers during the forthcoming year.

The Stay Putters – Is This You?

However, as well as the prisoners, there remains 4.4 million ‘stay putters’. This is 39% of total borrowers who could already benefit financially from re- mortgaging, but have not organised to do so.

These easily outnumber the 2 million ‘savvy switchers’ (18%) who have taken the initiative and improved their deal by re-mortgaging over the past 5 years.

The challenge understandably for any customer, is to truly know, whether they are 'staying put' for the right or wrong reason.

These borrowers need to entrust their mortgage and financial advisers to have an open, transparent discussion and to keep the borrowers needs at the heart of the transaction, as not all customers are better off, remortgaging.

It is estimated that there are 2.8 million borrowers currently paying a rate that is far better than what is available in today’s market and these clients should not re-mortgage.

Customers need to ascertain are they in the 4.4m group who could benefit or within 2.8 million group who should stay put.

It is absolutely imperative to get proper, customer focused, regulated advice.

There has to be an acknowledgment, that some borrowers remain on lifetime Bank rate or Libor tracker deals taken out before the financial crisis of 2008-9 and currently pay less than 2.5%.

At Capital Fortune, we have a number of customers for whom, many years ago, we secured buy to let products at 0.19% above the Bank base rate. These clients are currently paying 0.69% per year to the lender and we are clear, these clients should remain static with their current provider.

No broker nationally, will be able to get them such low rates for a very long time and unless they feel their circumstances have changed and they are desperate to fix, because they want a guarantee of the longer term monthly payments, they should enjoy the benefits of their low level, standard rate for as long as they can. These borrowers are few in number but research indicates that similar lucky borrowers nationally, are saving £5.4 billion a year in interest, relative to customers on the average standard variable rates.

Summary

There is no doubt that the UK re-mortgage market has been languishing behind the purchase market in terms of recovery. But the stage seems set for the re-mortgage market to experience a significant pickup in activity given the significant rise in competition. Although lending criteria has tightened under the Mortgage Market Review, the available options have greatly improved and the costs of re-mortgaging, seem to us at record low rates
 
Recovering house prices mean many homeowners are in a strong position to re-enter the market for the first time in years and many have the equity needed to access new loans. Many borrowers are looking to position themselves on the most favourable deals.

There may be a whole host of reasons for re-mortgaging or otherwise, but complacency should not be one.

There may be no better time to re-assess your options by spending say 15 minutes of your lunch hour, reviewing your existing arrangements.

It could be the best working lunch ever spent.

Rob Killeen is the Business manager at Capital Fortune, Protection and Mortgage Advisers based in the City. He is also a practising Barrister.

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