In the UK, mortgages are amongst the products with the highest switching rates. Overall, the mortgage market works well for most consumers. FCA research carried out in 2016 found that 10% of mortgage holders were “inactive” – defined as those who had been on a reversion rate for half a year or more, when they would have benefitted from switching and would have been able to do so.
We find that, among mortgage households, those who do not remortgage have slightly lower incomes (on average £46,600 per year for non-switchers, £50,900 for those who switch internally and £58,700 for those who switch externally). They are also more likely to live in households where the mortgage is in the name of a single borrower, be older and live in slightly less affluent areas.
It is important to note that this is not because those on lower incomes have a lower availability of mortgages. We also find that brokers play a role in encouraging switching.
We discuss these findings in the rest of this article, while our Occasional Paper provides a detailed account of our analysis.
To study the potential drivers of remortgaging, we needed a full picture of the consumers’ journey, from when they take a mortgage for the first time, to when they are first faced with the choice to remortgage, either internally (with their existing lender) or externally (with a different lender).
This was done by focusing on a subset of ‘new borrowers’: first-time buyers and home movers who took out 2-year fixed-rate mortgages between July 2013 and June 2014. This is different from the sample used for the MMS, that included all mortgage holders.
The core data for the research was Product Sales Data (PSD), collected by the FCA, both at the time a new mortgage is issued and regular six-monthly updates provided by lenders on their mortgage portfolios. The FCA’s MMS also provided data on internal remortgages, not included in PSD data, from 20 major lenders, accounting for 95% of the mortgage market.
The study excluded those who were remortgaging, as these borrowers would already have a propensity to remortgage and this could skew the findings. We also excluded those who would have been unable to remortgage due to arrears or who were in the final stages of their mortgage term, leaving a sample of around 270,000 mortgages.
This sample provided a rich set of borrower characteristics. These included the age of borrowers, their income, whether they were dual or single borrowers, whether they were first-time buyers and whether they used a mortgage broker.
Our dataset was supplemented with the Government’s Index of Multiple Deprivation (IMD, available for England only), which ranks neighbourhoods on the basis of average income, employment, education of residents, crime rates and other area-level variables.
How many do not remortgage?
We look at borrowers’ behaviour at the time their introductory rate expires to see what they do. Consistent with the MMS, a large proportion of the borrowers are attentive when their introductory rate ends. In our sample of ‘new borrowers’, 66% of people remortgage – either seeking a new deal with their existing lender (47%) or a deal with a new lender (19%). Most of these do so well in advance of their mortgage deal expiring, anticipating the change in mortgage rate and acting to forestall it.
About 14% re-pay their mortgages, most likely by selling their house. This leaves 20% who do not remortgage at the expiry of the introductory rate, and so end up on their lender’s reversion rate. This figure is not comparable to the 10% of individuals on the reversion rate that could have benefitted from switching identified in the MMS, because we focus on a subset of borrowers, rather than the whole population.
Actions at the end of introductory mortgage rate
How much could they save by remortgaging?
The benefits from remortgaging range widely, because of the variation in the size of mortgages. This typically reflects the income of the borrower (higher income borrowers tend to have bigger mortgages).
Comparing typical reversion interest rates for our sample with rates available to borrowers had they remortgaged onto another 2-year fixed term product provides some indication of the possible gains from switching.
Consistent with the MMS, we estimate savings by looking at the mortgages offered by lenders to their existing customers. Because switching internally is available to all borrowers in our sample and it requires less effort than switching to another lender, we view this as the most appropriate comparison for non-switchers.
It requires less effort because all lenders in our sample allow customers who don’t change the terms of their loan to remortgage internally without affordability checks.
We found that among the consumers in our sample, those who do not remortgage could have saved around £2,300 a year on average if they had remortgaged with their existing lender. Naturally, the estimated benefits are higher than those estimated in the MMS. Again, this is because of the distinct nature of our sample, which only includes first-time buyers and home movers, who tend to have larger outstanding loans. Savings are greater the larger the outstanding loan.
The distribution of savings is quite wide: the 10% of borrowers with the lowest saving could have saved up to £800 per year by remortgaging with their current lender. Those in the top 10%, who have much larger mortgages and over 4 times higher income, could have saved at least £4,400 per year.
Who are these borrowers?
The borrowers who do not remortgage are more likely to have slightly lower income (average income is £46,600 per year for non-switchers, £50,900 for those who switch internally and £58,700 for those who switch externally), smaller loans, lower loan-to-income ratio and lower loan-to-value ratio than those who do remortgage. On average, they live in slightly less affluent areas: the median IMD of borrowers on reversion rate is around 16,000, while that of switchers is 18,200 for those who go internal and 19,600 for external).
The incentives to remortgage depend on the expected benefits – how much gain there is from remortgaging. This can be considered in absolute terms (pounds and pence, as we did above), in which case lower-income borrowers, who have smaller mortgages, appear to have less to gain from remortgaging, while high-income borrowers with large mortgages stand to gain more by remortgaging.
But it is important to also consider the relative value. The savings from remortgaging may be smaller in absolute pound and pence terms for a low-income borrower than for a high-income one, but they may represent an equal (or even a greater) proportion of income.
Because the sample data included income levels, it was possible to calculate savings as a proportion of income. We found that for similar savings to income ratios (grouped in 10 equally sized buckets in the figure below), lower-income borrowers are much less likely to remortgage. We also find that at a given income, the higher the savings in proportion to income, the more borrowers switch.
How likely are people to remortgage
It is important to understand that this finding is not influenced by the lower availability of mortgages to those with lower incomes. Even borrowers who suffered a decline in income are able to remortgage with their existing lender. Results are also not influenced by monetary fees, as we take those into account in the analysis.
The difference in switching rates for borrowers with the same potential savings relative to income at different points of the income distribution is significant.
Let’s look at rows 5 and 6 in the table above, ie the central 20% of the distribution. On the one hand, among those in the top ten percent of earners, only 15% end up on the reversion rate when their introductory deal ends. On the other hand, among those in the lowest ten percent of earners, 35% end up paying reversion interest rates.
The range varies, but the figures consistently show a gap: whatever the level of benefit as a proportion of income – low earners are less likely to remortgage.
While income appears to be a key factor, the research also aims to identify what other features might distinguish those more likely to remortgage from those less likely to remortgage.
When income variables and expected benefits are stripped out of the data (a regression analysis was used to control for income and mortgage benefits) we find two characteristics that appear significant.
First, where a mortgage is in the name of a single borrower they are less likely to remortgage (1.4 percentage points). This suggests that households in which two people are on the mortgage find it easier to remortgage for reasons other than money, such as the time and effort required. Put crudely, two heads may be better than one in these circumstances. Second, older borrowers are less likely to remortgage (eg. borrowers over 50 years of age are 4.9 percentage points more likely to end up on the reversion rate than borrowers below-40).
Do brokers encourage remortgaging?
One other clear distinction that emerges is between those who use a mortgage broker and those who do not. Borrowers who used a broker to help select their initial mortgage are more likely to remortgage when their 2-year fixed term product comes to an end than those who purchased their mortgage directly from the lender.
Of the borrowers who bought directly from a lender, 26% did not remortgage at the end of the introductory rate period and ended up paying reversion rates. Among those who used a broker, 17% did not remortgage.
It is possible that this difference partly reflects self-selection. That is to say, those who choose to use a broker when they take out their mortgage are also more attentive and more likely to shop around, and therefore more likely to remortgage when their introductory period ends.
To disentangle this self-selection effect, we look at brokers who cease trading in the timeframe of our analysis. Brokers who cease trading might notify their clients before closing their shop, and redirect them towards other intermediaries. But even if this is the case, the process for their clients will still be more cumbersome (they will need to switch broker and possibly incur some search costs). This can be expected to reduce their likelihood of remortgaging.
The research confirms this. Borrowers who use a broker at the initial date are more likely to remortgage. The effect is still significant, though roughly halved, if the original broker has become inactive. This confirms our hypothesis: the presence of a broker increases the likelihood of remortgaging, even when trying to control for the self-selection.
While only a minority of borrowers do not remortgage at the end of the introductory rate, within our sample these borrowers lose an average of £2,300 a year. We also find that those who don’t remortgage are not very dissimilar from those who do: they have slightly lower incomes, are slightly older, are more likely to be single borrowers and live in slightly less affluent areas. Finally, having a broker increases the likelihood of switching promptly.