Families hit by ‘mortgage loyalty penalty’

Some of Britain’s biggest banks are exploiting their customers’ loyalty by saving the best rates to tempt new borrowers, analysis has revealed.

In the worst cases, loyalty is costing hundreds of pounds a year in additional interest payments. Figures published by UK Finance, the banking industry trade body, show that there has been a spike in the number of so-called product transfers in the past year. These allow customers to secure a new deal with their current lender and avoid the hassle of switching. About 292,500 transfers were carried out in the second quarter of 2019, up 7.3pc year-on-year.

However, rather than rewarding faithful homeowners, some lenders charge existing customers higher rates than newcomers.

Analysis for Telegraph Money by Private Finance, a mortgage broker, of the country’s 10 biggest banks and building societies found that families could face extra charges of more than £1,000 if they stayed loyal.

Its research looked at how banks would treat an existing borrower completing a transfer compared to a new customer with the same financial circumstances. The analysis used a property worth £386,466, the average price of a detached house in England, where the customer is borrowing 70pc of its value on a five-year fixedrate deal.

It found that NatWest customers suffered the biggest loyalty penalty, being charged an additional £1,311 over the five-year term.

At TSB, the homeowner would pay £1,222 more than the new customer over the course of their mortgage deal.

Only one major lender rewards their mortgage customers for loyalty – Nationwide. It offers cheaper deals to existing customers who transfer, with the example homeowner saving £1,165 over five years.

The other lenders included in the research offered the same rates to all customers, although no comparable data was available for Santander or Accord, part of Yorkshire Building Society. Outside the country’s 10 biggest, other large lenders also apply loyalty penalties to existing customers. Brokers said this list included Bank of Ireland UK, Leeds Building Society and Scottish Widows Bank.

In response, these three lenders, plus NatWest and TSB, said that they offered a range of competitive deals for both new and existing customers.

Chris Sykes, of Private Finance, said: “Although loyalty sometimes does pay, it is always best to review the whole of the market to find the best deal.”

Many borrowers may be walking into more expensive deals without knowing. Of the transfers carried out, UK Finance said 56pc of customers did not receive any financial advice prior to making their decision.

There are some benefits to internal transfers. Banks will not apply fresh affordability checks to these customers, which often means the process is shorter.

But even when a lender offers the same rates to existing and new customers, the savings made by switching can be substantial. In this scenario a Halifax customer would save £3,768 by moving to NatWest.

It is not just the mortgage industry that penalises loyal customers. Insurers have come under fire for offering poor-value deals to customers who renew their policies. The City watchdog has announced plans to ban the practice, arguing that the average consumer is overcharged by £200 per year.

Homeowners who stick with their initial bank pay as much as £1,311 in extra interest, warns Adam Williams