FCA issues research on mortgage switching

We have published:

• Mortgage switching research report[2]
• Occasional Paper 54 on the characteristics of consumers who do not switch[3]
• Occasional Paper 55 on brand loyalty in the mortgage market[4]

Based on our research, we believe there is a case for intervening to help mortgage customers who do not switch. We will issue a consultation paper on potential remedies later this year.

Our research found the factors that contribute to the decision not to switch include a lack of time, a fear of the application process and, for many, relative contentment with their current lender or deal.

The consumer research also suggests that consumers could become better engaged with the switching process if given the right information at the right time.

We also found that consumers that do not switch, as is the case for most mortgage borrowers, are less likely to be vulnerable compared to the general population.

Our research found that those not switching:

• Had an average income of around £46,600 per year. Households that switched had an average income of around £50,900 if they switched internally and £58,700 if they switched externally
• Lived in areas that are neither particularly deprived nor particularly affluent. The Index of Multiple Deprivation (IMD) ranks every small area in England from 1 (most deprived area) to 32,844 (least deprived area). The median IMD of borrowers on reversion rate was around 16,000, which is close to the median for England of 16,422. The IMD for those who switched is slightly higher: around 18,200 for internal switchers and 19,600 for external
• Were more likely than those who switched to be older. Their average age was 36 years old and 90% of them were 50 or younger
• Were more likely than those who switched to have a mortgage in the name of a single borrower
• Were less likely than those who switched to have used a mortgage broker to find their initial deal

Based on our research, we have considered a range of different remedies and intend to consult on our proposed response in the second quarter of 2020.

Background:

The Mortgages Market Study[5] identified that some consumers are choosing not to switch to cheaper deals, despite being eligible to do so. This found that up to 800,000 consumers are missing out on an average of £1,000 a year by not changing deals.

Similar issues were highlighted in the Citizens Advice super-complaint to the Competition and Markets Authority (CMA) about the ‘loyalty penalty’ where some longstanding consumers pay more than existing consumers in a number of markets including mortgages, cash savings and home insurance.

In January 2020, we published our update on our work across these 3 financial services markets as part of the super-complaint. Our update made clear our priority is to ensure that markets work well and provide fair outcomes for longstanding and vulnerable consumers.

Summary of findings from our research

This research improves our understanding of the way consumers on the reversion rate behave in the mortgage market and what their characteristics are. It is also relevant to understanding longstanding consumer behaviour across the essential household markets covered by the loyalty penalty super-complaint and informs our potential remedies on mortgage switching.

Characteristics of inactive mortgage consumers

The key findings from our research on inactive consumers characteristics are:

• Age: Inactive consumers tend to be older as the consumer research found that 23% of the ‘non-switchers’ in their sample are aged 55-64 years whereas 12% of all mortgage holders are that age (as found in the 2017 Financial Lives Survey). The OP 54 found that of a subset of new borrowers, those who had not switched were more likely to be older than those who had.
• Income: OP 54 found that recent home buyers who do not switch were more likely to have a slightly lower income than those that do switch. However, the consumer research found that these ‘non-switchers’ had a similar income profile to all mortgage holders in general. For both groups, around 70% had an annual household income of over £30,000. Only 3% of non-switchers earnt less than £15,000, the same proportion as all mortgage holders.
• Household composition: OP 54 found that recent home buyers who do not switch were more likely to have the mortgage in the name of a single borrower. This indicates that households where 2 people are on the mortgage potentially find it easier to remortgage.
• Where they live: OP 54 found that recent home buyers who do not switch were more likely to live in slightly less affluent areas than those that remortgage. The average IMD of borrowers on reversion rate is 15,964 and this was slightly higher for those who switched at 18,149.
• Brand loyalty: The consumer research found many non-switchers are loyal to their current lender with over half saying they have not switched because they trust their lender. OP 55 found similar loyalty among first-time buyers and home movers, this brand loyalty was so strong that even in a hypothetical scenario where all borrowers in the sample considered all the alternatives available to them before choosing a mortgage, nearly half would still go to the lender with whom they have a current account.
• Use of a broker: The OP 54 analysis found that consumers who used a broker to help select their initial mortgage were more likely to remortgage than those who purchased their mortgage directly from the lender.

What are the implications for further action?

The consumer research found effective remedies would need to:

• Engage consumers in the switching process: While many of these consumers were aware of the switching process, around 40% had never considered switching with their current lender. Also, only 1 in 5 recalled being contacted about switching or renewing their mortgage deal.
• Set out the case for switching: On average, these consumers say that a monthly saving of £120 would encourage them to switch mortgage. Their main consideration is getting the best deal for them personally including getting information on potential savings and reassurance about the other barriers in the switching process.
• Give individuals enough of the right information: This should be provided without overwhelming them and causing them to disengage.