Forget being loyal to your lender when you remortgage the best deals are often only offered to new customers.
When it comes to personal finance, loyalty rarely pays. Stick with the same energy provider, broadband company or insurer for the long run, and you'll end up paying far more than a new customer. And the same goes for mortgages. "Some of Britain's biggest banks are exploiting their customers' loyalty by saving the best rates to tempt new borrowers," says Adam Williams in The Daily Telegraph. The newspaper has found that many banks are tempting existing customers to stay put to avoid the hassle of remortgaging but aren't then offering them their most competitive deals.
Make sure you avoid payment shock
Figures from UK Finance, the banking industry trade body, show a marked rise in product transfers (where a homeowner moves to another product with the same lender), to around 292,500 in the second quarter of 2019, up 7.3% year-on-year. The problem? Analysis for the newspaper by mortgage broker Private Finance found that some of the UK's ten biggest banks and building societies were charging existing customers over £1,000 more for remortgaging than they were charging new applicants. NatWest was found to have the biggest loyalty penalty £1,311 in total, based on a five-year loan, at 70% loan-to-value, on a house worth £386,000 (the average for a detached house in England). Indeed, of the institutions included, only Nationwide actively rewarded loyalty, with cheaper deals for existing customers.
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The research highlights the importance of shopping around for a new mortgage deal when your initial deal is about to expire. Wise remortgaging could save you an average of £1,000 a year, according to comparison site moneysupermarket.com. And with headline interest rates so low, it is particularly important to make the effort to do so right now especially if you are at risk of reverting to your lender's standard variable rate (SVR).
For example, if you have a two-year fixed-rate deal that is set to expire soon, you could be in for a serious payment shock if you don't act, warns Will Kirkman on thisismoney.co.uk. In September 2017, the average two-year fixed mortgage rate fell to its lowest-ever level at 2.17% (bear in mind this is an average some people would have found better or worse deals).
But right now, the average SVR is around 4.89%, according to comparethemarket.com. "A shift to that from 2.17% would see the average mortgage's monthly payments jump by 26% adding £175 as monthly payments rose from £680 to £855." By contrast, the best fixed-rate deals today come in at 1.21% for a two-year deal, or 1.49% for five years, both from Santander. On a £200,000, 25-year mortgage, the difference between paying 4.89% and 1.21% amounts to £383 a month, or £4,596 over a year. So if your current mortgage deal has expired, or is about to, make sure you start shopping around now for a new deal.
The good news is that there are plenty of really good deals around at the moment. If you are looking for a two-year fix then NatWest, RBS and Santander are all offering rates of 1.21%. Bear in mind that all these deals come with product fees of £1,000, which you should factor into your comparison (the smaller the mortgage loan, the more significant the fee). Fix for longer and you could get a rate of 1.49% from Santander fixed for five years.
If you don't want the hassle of remortgaging too often, you could consider a ten-year fix. These long deals are becoming increasingly popular and they are extremely cheap by historic standards. The best buy at present is Virgin Money's 2.35% mortgage, according to moneyfacts.co.uk. Just be careful to check the terms and conditions is the mortgage portable? And what about redemption penalties should you want to repay early?
Remember that the interest rate you'll be offered on your mortgage will depend on the value of your house, the amount you want to borrow and your credit rating. You may find that your current lender still offers the best deal but just be sure to check the rest of the market first.
Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance.
Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.
Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.
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