If your mortgage lender has just contacted you to arrange a remortgage, be aware that this approach is not being made in the spirit of Christmas giving. Banks and building societies are managing to persuade a quarter of all homeowners coming to the end of a fixed-rate mortgage period to stay with them, rather than quit for a better deal with a competitor. But the result of assuming that your lender has your best interests at heart can be costly.
By not being loyal, a homeowner could save £750 a year when they remortgage, assuming they have a £300,000 loan on a property worth £500,000, according to the Edinburgh Mortgage Advice company. This is the difference between a typical two-year fixed-rate that lenders offers existing customers (1.69 per cent) compared with the 1.24 per cent market-leading rate they could have secured with another lender.
Mortgage companies usually approach their customers between three and six months before the end of their loan’s tie-in period and offer them a range of deals, sometimes offering to waive any early repayment penalties to persuade borrowers to fix a new deal faster. People on top salaries are being approached even earlier as lenders attempt to secure their business and avoid losing them to mortgage brokers.
“Usually it’s a letter that says: ‘You are coming to the end of the term. Here are some new rates we can offer you.’ Sometimes it’s a tick-box exercise,” says David Copland, the director of the TMA mortgage club.
The problem with this is that the rates offered on product transfers are unlikely to be the best on the market and could discourage customers from shopping around.
The Financial Conduct Authority (FCA) this week launched a review of competition in the mortgage market and such pre-emptive loan offers could well be an area it looks at.
“I used to work for a lender and we had three floors of people arranging product transfers. The customers were getting a rate that reflected the fact that they hadn’t shopped around,” says Mark Dyason, the director of Edinburgh Mortgage Advice. “If the rates and service lenders were offering were genuinely good, then they wouldn’t have to offer them at an earlier stage, because people would pick them anyway.”
The push to sign up borrowers early has increased significantly in recent years because more people are shopping around for products.
Ten years ago the mortgage transfer market was minimal — now, says Mr Copland, it represents a quarter of all loans. It has grown since the credit crunch “and has skyrocketed since the Mortgage Market Review”, he says.
The reforms brought in under the review aimed to stop unaffordable lending and placed an emphasis on borrowers receiving thorough advice.
It meant that you could no longer call your mortgage company, or pop into a local branch, and emerge with a new mortgage ten minutes later.
Typically people need to spend two hours with a mortgage adviser, leading many to conclude that they may as well see a mortgage broker. This leads to them bypassing their lenders, thus hurting the profits of many banks and building societies.
There is still a way a lender can arrange a mortgage quickly and without advice in ten minutes, however, which is by offering a tick-box mortgage transfer form, which the borrower fills in and returns.
Mr Copland believes that the “vast majority” of people who remortgage with their existing lenders do so on this “executed only basis”, which is quick and easy, but often not accompanied by the right advice. This may prevent a borrower seeking redress from the FCA should they come to regret their decision.
“The issue is whether there are sufficient health warnings attached to these loans,” says Mr Dyason. “The Mortgage Market Review stated that everyone needs advice and yet lenders have worked out a way to bypass this.”
Maria Harris, the director of retail mortgages at Atom Bank, says: “Clearly the best product offered from your existing lender might not be the best product on the market.
“While waiving a redemption penalty early to secure a better rate might sound attractive, it is not necessarily as competitive as another lender’s product. For example, what overpayments can they make without charges, can they take the mortgage with them if they are planning on moving home?”
Remortgaging with your lender is often an attractive time-saving prospect, however: one that doesn’t require you finding payslips, bank statements and P60s, and spending two hours of your time answering questions at a bank or building society.
It’s also an easy win for lenders. In the first nine months of this year remortgaging approvals were 15 per cent higher. People who are remortgaging also have equity, which makes them less risky borrowers.
Simon Turner, an area manager for a finance company based in Birmingham, recently received a letter from his lender offering him lower rates. “I looked at the lowest rate the lender was offering and compared it with the rest of the market, through my broker, and found it was more than £100 more expensive a month,” he says.
“I’ve been in this situation a few times now and every time I get a better deal through my broker.”
● Furness Building Society has a discounted variable mortgage for two years at
1.24 per cent, for borrowers with a 20 per cent deposit or equity
● TSB has a fixed-rate mortgage for three years at 1.54 per cent, requiring a 20 per cent deposit
● Melton Mowbray building society has a 1.5 per cent variable loan at 1.5 per cent fixed for three years, if you have 35 per cent equity.
● Saffron building society offers a 2.19 per cent, discounted variable mortgage fixed for three years, with a 20 per cent deposit
● Coventry Building Society offers a 2.09 per cent fix for five years, if you have 25 per cent equity