Money: Penalty points for loyalty

A leading financial information group is accusing mortgage lenders of deliberately penalising their existing borrowers in order to attract new customers.

MoneyFacts, a highly respected provider of mortgage and savings statistics, says offers from lenders to new borrowers are generally far better than to their older ones.

"Products available for `switching' - existing borrowers not moving house or lender but who wish to remain with the same lender - are usually offered somewhat under sufferance, and rates are not usually as competitive as those on offer to a new borrower who has never been with that lender before," says Vicky Burn, mortgage editor at MoneyFacts.

She gives the example of Halifax, where a typical discounted variable rate for new borrowers is 6.95 per cent until the end of August 2003. Yet, while this rate is also available for people who want to switch to Halifax, it is denied to the neo-bank's existing borrowers.

"This does seem to indicate that lenders are deliberately using long- established loyal borrowers to subsidise the much lower rates they think they have to offer to get new business," Ms Burn adds.

Research from MoneyFacts shows that, until eight or nine years ago, fixed mortgages were virtually unheard of. Even in 1991, only 23 out of about 100 lenders offered fixed rates. Within a year, almost half did.

The property recession forced lenders to introduce incentives to attract custom. Discounted mortgages were the first, followed by cashback mortgages. At first, these were offered only to people moving house but are now available to anyone wishing to remortgage.

In turn, this means swapping lenders has become the logical way to get a better deal, increasing the need to penalise existing borrowers to entice new ones.

Ms Burn points out that few lenders actively try to encourage loyalty from existing borrowers. Just 12 offer preferential rates if customers have been with the lender for more than five years. Of those, all are building societies bar Northern Rock.

But she adds: "Most of these loyalty schemes still compare badly with the rates some new borrowers are being offered."

Among lenders with loyalty packages is Coventry BS, which offers a variable rate of 7.95 per cent to those who have been with the society more than 61 months. Bradford & Bingley offers a variable rate of 8.25 per cent if borrowers have been with it for two years or more, while Britannia pays a cash bonus, depending on the size of the loan and the number of years they have been with the society.