Does loyalty pay in the mortgage market, or should you switch lenders for the best deal?
These days lenders are lending less and working a lot harder to keep their existing customers loyal. In October 2012, for example, Nationwide launched a new mortgage range, with two tiers of pricing – lower rates for existing mortgage customers and higher rates for new ones. The difference isn’t massive (0.10 percentage points) but the savings add up over a number of years, and the fact that the lender has given existing borrowers exclusive access to its best deals highlights that it is actively rewarding loyalty.
Tracie Pearce, Nationwide’s head of mortgages, explains: “We wanted to give existing customers the clear message that their loyalty is valued. When other providers use their best deals to lure in new customers, it’s reassuring to know that as an existing customer you will be offered our very best rates.”
In fact, Nationwide is not the only lender coming up with tempting deals in a bid to get borrowers to stay. Barclays Woolwich also launched a new range to its existing borrowers last month, with some seriously competitive rates for those who decide to stay with them. Strings attached Banks and building societies also encourage loyalty by offering better mortgage rates to those who hold a current account with them.
Indeed most of the major lenders offer a mortgage discount or incentive to existing banking customers. Nationwide has its Flexclusive mortgages, exclusively for holders of its Flexaccount current account, Lloyds TSB offers current account holders an extra 0.2% off their mortgage rate, while HSBC cuts its arrangement fees for holders of its Premier and Advance current accounts.
NatWest is currently offering £250 cashback to banking customers who take out a mortgage with them, plus it has exclusive mortgage rates for those who hold Private, Advantage Private, Advantage Gold and Black current accounts.
And Santander recently launched a market-leading five-year fixed rate mortgage at 2.99% exclusively to home movers who either already hold a Santander mortgage, or current account customers.
You can find many different types of loyalty deals across the market. For example Coventry Building Society offers better rates to first-time buyers who have parents or grandparents that have held an account with the society for the last three years.
They can access a mortgage with just a 10% deposit and the rate is 0.39% percentage points below what everyone else pays.
Is it worth being loyal?
Just because many lenders offer loyalty deals doesn’t mean that they are necessarily worth taking. Lenders give you a discount to stay with them or move your current account to them because it is cheaper for them to retain clients than to acquire new ones.
After all, they already have a lot of your financial information, and they know your mortgage repayment record. Plus, they know that if they can tie you in with more than one product it’s far less likely you will decide to leave.
Mark Harris, chief executive of mortgage broker SPF Private Clients, explains: “Several lenders are offering existing customers more attractive mortgage deals than new customers because it is cost-effective for them to take this approach. If they can sell several products to one customer, and generate customer loyalty, they can save money on advertising to attract new business.
“The other advantage is that they already know the customer and understand their financial capabilities - particularly important in these testing economic times.”
But what’s in it for you? A better rate, a discount off the arrangement fee, or perhaps a smaller deposit is required? These could all be very useful but remember that just because you are getting a better deal from your lender than other customers, doesn’t mean there aren’t even more attractive ones in the wider market. While it is always a good idea to approach your lender or your banking provider to see what they can offer you, it is just as important that you shop around.
In many cases the best buys are actually better than many loyalty deals on offer. Harris agrees: “Borrowers should beware. While a bank may offer the best current account, or credit card, or mortgage rate, it's highly unlikely that it will be equally competitive on all products. Shopping around is still the best way of ensuring that you get the right products for your circumstances - and don't pay more than is absolutely necessary.
“Some loyalty deals are competitive whereas others are only slightly better than the rates offered to new customers and you could get better from another provider. Think about the hassle involved too: is it worth going through the hassle of switching your current account to your mortgage lender in order to get a slightly better rate?”
Loyalty only goes so far
With the economy still fragile and job security a rarity, many borrowers are unsurprisingly paying greater attention to the security and stability and flexibility of the organisations with which they have financial relationships. Because of this you may be more comfortable staying with your current lender, particularly if they are a well-known high street brand.
That’s fine, but remember that some of the biggest names in UK banking were bailed out during the credit crunch, including the Royal Bank of Scotland, Bradford & Bingley and Northern Rock. All mortgage lenders are regulated by the Financial Services Authority, even small lenders you may never have heard of.
Finally, don’t expect too much back for your loyalty. While your lender may offer you a better deal, or a lower fee, that’s because they have a strategy in place to retain you as a customer. Your loyalty will not mean you get better treatment in the event that you lose your job or cannot meet your mortgage payments. All mortgage lenders will work with you to try to help you get back on track, but you won’t be cut any extra slack just because you have been with your lender for longer than other borrowers. In other words loyalty mortgages only go so far, so while they might appeal, make you feel valued and seem like the easy option, always do your research. They may work out the best option for you, or there could be better deals elsewhere.