Is loyalty costing you?

Over the years I have noted an impressive loyalty shown by clients towards their banks.

Considering how poorly most customers are treated and the battering the banking industry took as a result of its role in the 2009 credit crisis, this loyalty has been baffling me.

Personally I have never had a very devoted relationship with my bank. From day one, it was made clear that I am a number, and subject to binary decisions: the computer either said “Yes” or “No”. On several occasions I have been met with a nonsensical “No”, simply because the computer said so.

Loyalty is a fairly common feature amongst us humans and I value it particularly highly. The phenomenon of loyalty can most probably be traced back to a successful survival tactic of our genetic ancestors. Loyalty over time would usually be rewarded with a favourable outcome later when the odds weren’t quite in one’s favour. A small sacrifice now, because I know I might need help in the future.

However, according to the Citizens Advice Bureau, loyalty towards mortgage providers is not a successful strategy. “Loyal customers who don’t remortgage after their fixed-term deal can pay an extra £400 a year.” For the typical LPW client, we can safely assume this cost will be significantly more.

We asked our mortgage advisor, Neil Zaayman, to give us an illustration of the probable savings obtainable for a typical LPW client who remortgaged and it came to a staggering £636 per month, or £7,632 per year. As pre-tax income, that equates to £12,720 for a 40% taxpayer.

It is clear – you are better off remortgaging to a new rate for a lower monthly payment. It is unlikely that the best rate will be found with your current bank and no gesture of loyalty will convince them to better their offer.

Terms used in our calculations:

Loan Amount                                                 £500,000

Loan-to-Value Range of                               60%–90%

Repayment Method:                                     Capital and Interest

Term:                                                   25 Years

Deal Term:                                          2–5 Years Average

Deal Type – Average of                    2 Year Fixed Rates & 2 Year Tracker Rates & 5 Year Fixed Rates

The table below contains detailed interest rate figures and calculations:

Property Value Loan Amount LTV 2yr Fixed Rate Monthly Payment Over 25yr Term 2yr Tracker Rate Monthly Payment Over 25yr Term 5yr Fixed Rate Monthly Payment Over 25yr Term SVR @ 4% Avg Monthly Over Payment
£888,333 £500,000 60% 1.09% £1,904 0.99% £1,882 1.69% £2,044 £2,667 £723.67
£666,666 £500,000 75% 1.15% £1,918 1.25% £1,941 1.79% £2,068 £2,667 £691.33
£555,555 £500,000 90% 2.09% £2,141 1.99% *discount rate £2,116 2.59% £2,265 £2,667 £493.00
Monthly Avg £636.00
Annual Avg £7,632.00