Why mortgage lenders should treat borrowers fairly

Imagine your mortgage repayments doubling overnight.

It’s a borrower’s nightmare, yet it’s much more common than you think.

Research by Trussle, the online mortgage broker, found that the mortgages of two million homeowners in the UK had lapsed onto a Standard Variable Rate (SVR).

Lenders move borrowers onto their SVR when their initial mortgage deal comes to an end. It means that homeowners start paying much more for their mortgage than they need to.

If you’re on the average SVR, and move onto a market-leading mortgage deal, you could save an average of £300 a month or over £4,000 a year, the broker found.

It means two million home owners in the UK are losing £9bn a year.

Switching mortgages isn’t easy

Changing to another mortgage can be confusing and stressful. Some borrowers don’t bother even though it could save them money. It’s so common it even has its own term – switching inertia.

And there’s another problem.

Your mortgage is probably your biggest debt. Yet some lenders don’t warn you that your mortgage deal is coming to an end and they’re moving you onto their much more expensive SVR unless you find another deal.

As part of its Mortgage Market Study, the UK’s financial regulator, the Financial Conduct Authority (FCA), recognises there are inconsistencies in the approach that some lenders take in proactively contacting customers before they go onto their SVR.

It identified two large lenders that don’t engage with all their customers, either focusing efforts on those who are more likely to switch to a different lender or seeking not to proactively engage with customers on the SVR for longer periods.

Mortgage lenders don’t communicate well enough

Trussle found that 21% of borrowers said they couldn’t remember the last time their provider got in touch about their mortgage. Almost twice as many (37%) stated that their lender or broker doesn’t do enough to keep them updated.

Borrowers want much better communication from their mortgage providers. The majority – 83% –  think it would be useful if their lender sent them a letter three months before the end of their initial mortgage period telling them when it’s time to switch to a new rate.

And 79% of borrowers think more information about why they need to switch, and how to go about it, would improve the switching process.

Consumers need to know when payments rise

Regulation is the most effective way to ensure industries treat customers fairly.

In May 2019, Ofcom, the media watchdog, introduced rules forcing broadband, phone and pay-TV firms to warn you when your contract is coming to an end and let you know what their best available deals are.

The regulator found that customers who bundle their landline and broadband services together pay, on average, around 20% more when they are out of contract. Those who bundle their pay-TV with these two services pay 26% more.

Telecoms and pay-TV companies will have to warn customers between 10 and 40 days before their contract comes to an end. The alerts will be sent by text, email or letter.

The Central Bank of Ireland, the country’s financial services regulator, brought in new and enhanced requirements in January 2019 to increase transparency and help customers switch mortgages.

Lenders must:

  • tell you about cheaper options 60 days before you come out of a fixed-rate mortgage
  • tell you if you can switch to a cheaper mortgage based on how much equity is in your home
  • clearly explain the pros and cons of any mortgage incentives such as cashback offers
  • give you a comparison of how much your mortgage costs versus other options offered by your lender if you ask for one
  • give switchers all the information they need to switch, including how long it will take
  • give you a decision within 10 business days of receiving a completed mortgage application

We need to see something similar from the FCA.

What lenders need to do

The Mortgage Switch Guarantee is a set of commitments for lenders to ensure transparency

for borrowers at each step of the home ownership journey.

Lenders should commit to:

  • contact borrowers electronically, and by post, three months before their initial rate period ends
  • give borrowers important mortgage information online or by text
  • reveal the True Cost (with all the costs and incentives included) of a mortgage’s initial rate period

Lenders and policymakers should work together to implement the Mortgage Switch Guarantee, launched by Trussle, and address unfairness for borrowers.

Sign up here to support the Mortgage Switch Guarantee campaign. It’s time to show the mortgage industry and Government that transparency really matters.

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