A third miss out on cheapest mortgage even after seeing broker
It should be easier to search for the right deal earlier in the mortgage process with more tools available upfront to help both consumers and advisers, the Financial Conduct Authority (FCA) said.
Borrowers struggle to shop around for the best mortgage because there is no simple way to find out which products they qualify for upfront, according to its interim mortgages market report which launched in December 2016.
And even those who seek advice, which is the majority of borrowers, typically find there is little difference on the cost of the mortgage.
The regulator added many simply look at the headline rate without considering the overall cost of the mortgage.
At the same time, there are around 120,000 people on reversion rates, who could save money by switching but do not – or cannot, the FCA found.
It estimated there are approximately 30,000 ‘mortgage prisoners’, many of whom took out deals before the financial crisis who are now stuck on higher reversion rates.
Turning to inactive consumers, the city watchdog said this group could have reduced their APR by 0.5 percentage points on average (based on June 2016 data).
A comparison of payments under a 2-year fixed benchmark product, showed borrowers could have saved on average £1,000 per year during the two years of the incentivised period and around £100 a year in the following years until the end of the mortgage term.
Cheapest not always best
However, brokers suggested the regulator was wrong to focus on consumers getting the cheapest mortgage.
Andrew Montlake, director at broker Coreco, said: “The cheapest does not mean the best or most suitable and there are a myriad of other things to take into account such as service, fees, flexibility and of course lending criteria.
“Brokers do get the most suitable product for consumers taking into account both hard and soft facts, spending time to really understand their needs not just now but in the future.
“Chasing the cheapest rate and disregarding everything else can ultimately lead to the wrong consumer outcomes.”
Gemma Harle, managing director of Intrinsic’s mortgage network, added: “A huge proportion of the population engage in mortgages, which accounts for over 80% of total UK household debt. It’s crucial this market works effectively for all and it is encouraging that the market study has found that for the vast majority it does.
“A major theme of the interim study and its findings is more access to information for consumers. This can only be a good thing and will mean more informed decisions. With technological advances creating such tools should be straight forward, but will require the full engagement from across the industry and specifically lenders in sharing more information on their lending criteria.
“However, throughout the paper the focus was on price and the tone suggests that cheaper is almost always better. This ignores some of the complexity of mortgages. Parts of the population, such as the growing self-employed population, need flexibility, which can come in a variety of forms. Recognising this and choosing an appropriate solution requires an expert.”
The regulator is now set to work with lenders, intermediaries and mortgage sourcing systems to find how the market could develop tools that better indicate qualifying products for a borrower, ahead of its full report that will be published at the end of year.
The FCA said it will look at whether lenders should make eligibility and other qualification criteria widely available at an earlier stage.
The reported stated: “This could build on some recent innovation, should assist existing intermediaries, and also create other opportunities for new online tools.”
The regulator also said it had observed links between more expensive mortgages and intermediaries that typically place business with fewer lenders.
Overall, the FCA’s interim report found the mortgage market is working well, but falls short in some specific areas.