Why the FCA says We’re Too ‘Short-Termist’ when We Remortgage

Did you know that we tend to base our remortgaging decisions on gut instinct, rather than hard fact?

What you’re about to read might make you rethink your next choice of remortgaging product.

A recent report for the Financial Conduct Authority has some fascinating findings. They reveal how we could be making wiser decisions when it comes to remortgaging.

It’s called “Understanding Consumer Expectations of the Mortgage Sales Process”.

It was based on interviews and focus groups of First Time Buyers, Home Movers and Remortgagers.

The researchers spoke to a big cross-section of people. They had made their applications either directly with their lender, via an intermediary or via an execution only route.

Here are the report’s 4 most important findings.

1. New buyers are too focused on getting their hands on their new home. So they don’t pay enough attention to the product they’re getting.

Or, as the report more long-windedly puts it:

“For Home Movers and First Time Buyers, we found that the overarching priority when applying for a mortgage is buying the property they have in mind. The most important consideration for consumers at the beginning of their journey to purchase a new home is how much they will be able to borrow, as this will determine what and where they can buy. This preoccupation with finding the right property means that, in some cases, consumers do not appear to be fully engaging with the implications of their decisions regarding particular mortgage features.”

2. Homeowners remortgaging are more deal-savvy. But they’re not paying enough attention to the implications of what they’re signing up to either.

Or, as the report more long-windedly puts it:

“As they are not purchasing a new property, Remortgagers often spend more time than First Time Buyers and Home Movers on finding what they consider to be a ‘good deal’. However, in prioritising this, Remortgagers can also neglect to consider the future implications of their mortgage decisions.”

3. People taking out a mortgage or remortgage focus on the short-term benefits. Not the bigger picture.

Or, as the report more long-windedly puts it:

“This lack of focus on mortgage products amongst all consumer types could lead to some consumers failing to engage fully with the finer details…. Overall, we found that consumers struggle to think of mortgages in terms of ‘totals’ and long term ‘total’ figures.”

4. We’re easily swayed by offers of rewards or cashback. So when we take out a new remortgaging or mortgage product, we forget to do our sums.

Or, as the report more long-windedly puts it:

“Rewards and cashback in many cases offer a short term benefit, and are as such more attractive to consumers than for example, the longer term benefits of making lower interest payments in the long term.”

Remortgaging with the Long View

The report shows that homebuyers in the UK are ‘Short-Termist’.

It adds: “Once consumers have a sense of what and where they can buy, determined by the total amount they are able to borrow from lenders, their focus shifts to the initial monthly repayment amount.”

Not enough of us, it implies, are thinking far enough ahead!

We don’t realise, for example, that for financial stability, we could be braver and choose a long-term fixed product. A 5 or 10-year fix might suit better and be cheaper than the standard two-year fix.

As the report explains: “Many express a desire for stability in their mortgage, and therefore a preference for fixed rate products, but go on to choose a two year deal to achieve a cheaper monthly repayment amount,” it says.

But, it adds: “Consumers are not considering the time spent, product fees and the potential impact of rates increasing as a reason to take out a 5-year fixed rate product, such is the draw of their target initial monthly repayment figure.”

We tend to focus on the now, rather than the long-term. We also don’t grasp the implications the fees that a mortgage or remortgage application involves, and the potential advantages of securing a longer fixed term rate when remortgaging in order to reduce the impact of these fees.

How to Avoid the Common Mistakes when Remortgaging

So what can we take from all this?

• Take the long view
  Think through the implications of your decision. Try future-pacing. For example, if you’re tempted by a low-priced two-year fix, look ahead. All said and done, might it be better to go for a five-year-fix? Avoid incurring more costs in 2 years time – while at the same time bringing more certainty into your life.
• Examine your situation
  Consider hard what you need in your remortgaging product. Do you need flexibility or the ability to overpay? Then make sure you factor this into your product choice.
• Get advice
  We’re all capable of looking online at the best-buy tables. But few of us are up to the job of understanding the finer details and the terms and conditions. Let alone if the product we’re choosing is right for us now and in the future.

Do you have more questions about remortgaging with a long view or would like some advice on the right product type for your situation? We are happy to help you here.

We also recommend you read our news article : Clear Answers to the 12 Most Frequently Asked Questions on Remortgaging

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