New research from mortgage broker Habito suggests a worrying lack of awareness about how mortgages work. It shows how a lack of financial education can have a serious impact on personal finances. Here are some of the key takeaways.
Ignorance is not bliss
Almost 20% of people did not know whether or not they were on their lender’s standard variable rate (SVR). In other words, they do not understand one of the most fundamental points of their mortgage.
Almost half of the respondents did not understand what remortgage was. The source of confusion varied.
- 6% of respondents did not know the term remortgaging
- 8% of respondents thought it was the same as taking out a second mortgage
- 17% of respondents thought it meant taking on more debt or was only done out of need.
To be fair to the last set of respondents, remortgaging can be used as a way to cover other expenses. It can also be used as a debt consolidation tool. It may therefore be that these respondents have heard about it in that context and not really understood its wider meaning.
Inaction can be expensive
Just over a quarter of people knew that they were on their lender’s SVR. This means that either they did not understand the impact of this or they did understand the impact but were not taking action to remedy it. This could be because they did not see it as a priority or it could be because they felt they were not in a position to do so.
Interestingly 11% of people felt uncomfortable about having lenders scrutinize their finances. This is just under half of the people who knew that they were on their lender’s SVR. That could be a coincidence but it could also be cause and effect. In other words, people might grit their teeth and pay more than they needed rather than expose their financial situation to view.
There may also be a connection with the findings of separate research by another mortgage platform, Haysto. This highlighted the stress and frustration felt by people who had been turned down for a mortgage.
If people feel like their finances are too precarious for them to have a reasonable chance of being accepted for a new deal, they may not even try to apply for one. This possibility would tally with the fact that data from the Bank of England shows that between February and November 2020 remortgaging dropped 33%.
A little knowledge can be dangerous
A worrying one in ten people thought that paying their lender’s SVR would help them to clear their mortgage quicker. On the one hand, it’s great that people have grasped the general importance of paying as much as you can towards debts.
On the other hand, it’s very concerning that some people clearly do not understand the difference between capital and interest. Assuming this ignorance carries over into other areas of their lives, they could easily also be overpaying on other products such as loans and credit cards.
A possible way forward
While acknowledging the importance of personal responsibility, it is also important that businesses and governments are responsible too. As a minimum, the government/FCA could place an obligation on lenders to remind people when they are due to be switched onto the lender’s SVA.
This reminder could contain a clear explanation of the next steps, including the possibility of remortgaging. It could also have pointers to other sources of information such as the Money Advice Service.
If the government wanted to take this a step further, it could restrict the percentage of mortgages lenders could have on the SVR. This could be done either via a direct cap or by taxation.
Your property may be repossessed if you do not keep up repayments on your mortgage.