Mortgage apathy is costing borrowers 'significant sums'

When a fixed-rate discount mortgage ends, the smart money shops around
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The Independent Online

Discount-mortgage deals should carry a government wealth warning. If you are not careful, you could pay more than those who stay with a standard package, says new research. About 40 per cent of homeowners opt for discount deals, most of which run for two years. Many forget to switch at the end of the period, however, and end up with higher monthly payments than those wi

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Discount-mortgage deals should carry a government wealth warning. If you are not careful, you could pay more than those who stay with a standard package, says new research. About 40 per cent of homeowners opt for discount deals, most of which run for two years. Many forget to switch at the end of the period, however, and end up with higher monthly payments than those with average standard variable rate (SVR) mortgages, according to a report by Egg.

Some of the more tempting discounts range from Alliance & Leicester's 2.25 per cent, 1.5 per cent at NatWest, 1.75 per cent at Cheltenham & Gloucester and The Woolwich's 1.91 per cent. After two years, customers automatically go on to the four lenders' relatively high 5.95 per cent SVR. Instead of asking for another fixed-rate term or seeking a better deal altogether, however, many people stay put.

If they had opted for a mortgage with a company on a lower SVR, such as Nationwide's 4.74 per cent or First Direct and HSBC, who are both on 4.75 per cent, they would be considerably better off. In some cases, it could mean a five-year saving of up to £6,000 on a £200,000 mortgage.

Andy Deller, Egg's director of banking and insurance, says: "Apathy is costing borrowers a significant sum of money. Currently 40 per cent of borrowers are paying a standard variable rate. However, only 29 per cent of them started off on that rate. Unfortunately, the missing 11 per cent appears to be made up of borrowers rolling off introductory deals on to more expensive rates."

Deller adds: "Discounted-rate mortgages certainly help to reduce outgoings for an initial period and have real benefits if you are a committed switcher. However, the reality is that most homeowners are inefficient switchers, so they often find themselves sitting on a high outgoing rate once their upfront deal ends. While heavy discounts may sound appealing, it is the industry that benefits most."

Andy Homer, a spokesman for Alliance & Leicester, agrees with Egg's findings. "We've got nothing to hide here. People take out discount mortgages with us because of the short-term benefits, and it is quite true that if you don't move on to another fixed rate after two years, you will be worse off than with another provider on a lower standard variable rate." Homer says some major lenders tell their customers by letter when their discount mortgage is about to end, "though obviously some people overlook these letters".

Doug Fitzpatrick, a businessman from Lewes in West Sussex, has managed to get the best of both worlds. Two years ago he arranged a mortgage with Verso on a two-year, 2 per cent discount. Then, when the period ended, instead of reverting from his 3.95 per cent rate back to Verso's 5.95 per cent standard variable rate, he switched lenders and signed up with HSBC.

The mortgage company not only offered him a 4.75 SVR, but also a flexible mortgage with a cheque-book facility. "I've been wanting to add a garage on to my house, but I've been finding the costs of getting a loan from a high-street provider too high. Now I can raise the money to carry out the work and pay it back on the same interest-rate as my mortgage," he says. Market forces and timing seem to have created the fixed-rate boom.

"Companies are pushing fixed-rate deals to liven up the market during the traditionally quiet autumn period, pointing out that they are a convenient hedge against rising interest rates or a possible market-damaging war in Iraq," says David Smith, of PWS Partnership, the Surrey mortgage brokers. "We always advise our clients to switch to a better deal at the end of a fixed-rate term. It is the only sensible option. The irony for lenders is that after using discount mortgages to persuade people to stay, they end up sending them away and losing valuable business into the bargain."

One hurdle to moving your mortgage, however, is the redemption penalty. A number of two- and five-year discounts include forfeits of up to 3.5 per cent if you switch to another package with the same lender or move to another in a one- to three-year cooling-off period. This means a homeowner with a £300,000 mortgage could face a penalty of £10,000 or more for changing or moving. "It certainly helps to explain why some people on discount mortgages decide to stay on a high standard variable rate instead of looking elsewhere," says John Upton, a south-west London mortgage broker.

But there is another, less publicised, option for homeowners and lenders. This is known as the client-retention unit. "When they feel they are in danger of losing a customer, some of the bigger lenders use these units to offer clients special packages to persuade them to stay. The snag is that only a few members of the public know about these units and their benefits." Any homebuyer who wants a fixed-rate deal should opt for a tracker mortgage, Upton advises. This literally tracks the current bank rate and is fixed at between 0.5 and 1 per cent above it, unlike discount and standard variable rate mortgages, which are subject to the whims and decisions of lenders.

"The advantage of a tracker is its economy and reliability. Whether you take out a short- or long-term one, you always know how much you are paying and are immune to commercialism, competing lenders and market forces," Upton adds.

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