The Times (London) December 14, 2003 Property news It pays to swtich lender by David Budworth of the times BORROWERS do not get the best deal if they are loyal to their lender and should regularly switch their mortgage to keep costs down. A government report on the home-loan market published last week confirmed that mortgage lenders are exploiting loyal customers by charging them more expensive rates than new borrowers. David Miles, the author of the report, described the practice of making existing borrowers subsidise cheap mortgage deals for new customers as “undesirable”. He warned that he may call in the Financial Services Authority or Office of Fair Trading to investigate. More than 5m people — about 45% of mortgage borrowers — pay the standard variable rate (SVR) on their home loans. This is typically 1.7 percentage points higher than cheap fixed and discounted deals that lenders use to attract new customers. The difference can cost thousands of pounds over the life of a mortgage. If you paid a typical SVR of 5.75% on a £100,000 interest-only loan your interest payments would be £479.17 a month or £5,750 a year. Over a 25-year term you would pay £143,751, assuming the rate never changed. Lambeth building society is promoting a two-year rate of 3.38%. The repayments would be £281.67 a month or £3,380 a year — a saving of £2,370. Over a 25-year term, a borrower would save £59,250 by regularly switching to the best discounted deal. You could incur legal and valuation costs of about £550 when you remortgage, on top of a typical arrangement fee of £300. A borrower who switches every two years over 25 years could therefore pay £10,200 in costs. However, even when these extra costs are taken into account you could still save more than £49,000. If you are within the term of a fixed or discounted deal you will probably also have to pay a penalty to remortgage — even with your existing lender. But in some cases the savings could still make it worthwhile. Many lenders do not offer the best deals to existing clients. For example, the cheapest rate a loyal Lambeth customer can get is 3.78% for a two-year discount. Halifax, the biggest lender, flatly refuses to offer existing customers the cheap loans available to new borrowers. However, it is open about its policy and the rates available. Some other banks and building societies give existing customers a good deal, but you may have to push hard to get it. David Hollingworth of L&C, a mortgage broker, said: “Many lenders are extremely guarded about what they will offer to long-standing customers.” It is worth phoning your lender if you are unhappy with your mortgage. Most firms have business-retention centres that may give you a better deal if you threaten to switch. The rates may not be as keen as the very best fixes or discounts on the market, but they may be good enough to justify staying put. And you will typically pay only the arrangement fee. According to L&C, Britannia building society frequently offers decent rates to existing customers. Firms such as Alliance & Leicester, Nationwide, Northern Rock, Cheltenham & Gloucester, NatWest and Woolwich offer the same loans to both new and existing customers, but do not necessarily have the best deals in the market. More lenders are giving loyalty discounts. Skipton, for example, offers a 0.75 point discount off its SVR of 5.74% for customers who have been with the building society for two years, giving a rate of 4.99%; Britannia offers 0.2 points off its SVR of 5.75% after five years, reducing the rate to 5.55%, and 0.4 points after 10 years, cutting it to 5.35%. However, the rate that loyal customers end up paying is still normally higher than the lenders’ cheapest deals. Britannia, for example, offers the best two-year fixed rate of 4.19%, which is 1.16 percentage points cheaper than its 10-year loyalty rate and is open to existing customers. The loyalty rate does not typically apply to people on fixed or discounted deals. If a lender offers a loyalty discount it may be able to amend it at will. For example, until November Stroud & Swindon had a 0.45-point discount off its SVR for customers of five years’ standing. It has now cut this to 0.4 points. Simon Tyler of Chase de Vere Mortgages, a broker, said: “Loyalty discounts are better than the SVR, but you would save more in the long term by switching to a cheaper rate.” You can cut the costs of switching by keeping an eye out for special remortgage deals. For example, Nottingham building society has a three-year discount deal that charges an arrangement fee of £295 but includes a free valuation and £250 cashback, which can be put towards legal costs. It offers 2.01 points off its SVR of 5.54% giving a rate of 3.53%. There are risks if you constantly switch your mortgage. If interest rates rise you could face a big hike in your repayments when your deal ends. For example, if you lock into Britannia’s two-year fixed rate deal of 4.19% your monthly repayments would be £349.17 on a 25-year £100,000 interest-only mortgage. If at the end of the two years, rates have risen by two percentage points and the cheapest deal you can find charges 6.19%, your payments would shoot up to £515.83 a month — an extra £2,000 a year. However, given the current forecasts of future interest rates, Miles’s report shows that people who switch their mortgage regularly should still be better off. He estimates that over the next 10 years the average rate for a short-term discount or fix will be about 4.9%. Someone who takes out a long-term tracker would pay an average of just over 5.7%; a borrower who has a two-year discount and then moves on to the SVR for the rest of the term would pay an average of 6.2%. An alternative would be to take out a 10-year fixed rate. The cheapest deal currently on the market from Britannia charges 5.35%. On a 25-year £100,000 interest-only mortgage monthly payments would be £445.83 and the annual cost would be £5,350. Over 10 years this would work out at £53,500. When you add in the £299 arrangement fee and legal and valuation charges of £550, the total cost would be £54,349. But someone who switches every two years would still pay less, despite the remortgaging costs. _base_d on a rate of 4.9%, he or she would pay monthly interest of £408 or £4,896 a year. Over the 10-year term this would work out as a total of £48,960. If the borrower pays full arrangement, legal and valuation fees, remortgaging costs would come to £4,250. That would give a total of £53,210, which is still £1,139 cheaper. http://www.timesonline.co.uk/article/0,,587-933416,00.html