Rate tarts no longer welcomed by mortgage and credit card providers.
Richard Green
Abbey is the latest High Street mortgage lender to notify its customers that they are increasing the costs associated with switching from their mortgage to £225, this fee is over and above any other penalties levied for leaving early, and represents an increase of 25%. Abbey is however only the most recent in a list of 53 mortgage providers announcing similar steps within the last year.
Michael Coogan, Director General of the Council of Mortgage Lenders, said, "All lenders are having to look at their fees much more closely now". The recent financial reviews were attributed to the slowing of the housing market whilst administration costs have continued to rise, however David Hollingworth of mortgage brokers L&C agreed with the BBC that lenders were imposing the charge to discourage people from moving.
The Financial Services Authority advises caution when looking at the possibility of changing lenders. “Switching can cut your monthly payments. But you’ll need to weigh up these monthly savings or other benefits against the up-front costs of making the switch.”
The growth in the number of consumers switching their financial providers has occurred due to the recent growth in the number of finance assessment tables in newspapers, and financial comparison websites such as Moneynet which have been launched to help consumers to get the best rates available.
The ease with which consumers can compare the various rates and offers that are available has meant that financial product providers have fought to attract new financially mobile members from other providers, through special offers and limited term deals. By making use of these deals the financially mobile ‘Rate Tarts’ have been able to wipe thousands of pounds off their mortgage repayments, and some have even turned profits by regularly switching credit cards.
The main strategy that has been adopted by the credit card companies such as Egg, Barclaycard, MBNA, Alliance & Leicester, Tesco and Mint, to prevent rate tarts, is the introduction of about a 2% transfer fee on all balances between cards. Card holders will then usually benefit from an introductory period of up to 9 months at a rate of 0% interest being charged over the deal period.
Although the moves are designed to stop the actions of rate tarts eating into lenders profits, many experts still say that while there are more obstacles, and the benefits of switching have been reduced compared to past levels, borrowers can still save money by judiciously changing between lenders.
Savings Director for Chase de Vere, Sue Hannums, believes that, "Even with these new charges, those with outstanding debts on their credit card should still look to move to a cheaper deal. If they can switch from one introductory offer to the next they should make substantial savings over the long term."
Financial Director Stuart Glendenning states that consumers are saving about £1 billion a year by taking advantage of interest-free periods; however he suspects that, “Most banks are now working on a way to discourage rate tarts. This will probably come in the form of more widespread and more expensive transfer fees, particularly for longer interest free offers."
Martin Lewis, of moneysavingexpert.com, advises: "You must be vigilant and be prepared to transfer again and again if you want to make the savings. After a six-month interest free period, you only have to pay interest charges at the standard rate for two months to lose all of the benefits. And even if you forget to move from that card just one day after the free period expires, you will pay an entire month's worth of interest for that simple mistake."
For mortgage borrowers, the introduction of penalty fees does seem particularly harsh, as David Hollingworth of mortgage brokers L&C points out, "Most people's gripe here is not that there is a fee, but more about the increasing of that fee over the term of the mortgage, so when you are taking a deal out it can be one figure, when you come to actually switch, then you are looking at a very different figure." But the lenders view it as more of an effort to recover fees directly from the customers who are causing them additional costs, rather than including these costs into their overall interest rates thereby making everyone pay.
It seems that the financial industries love affair with attracting customers from competitors has finally ended. Whilst there are still many lenders willing to provide offers to attract customers, there are also many lenders now looking to make rate tarts an endangered species.
About the Author
Richard lives in Edinburgh working for bigmouthmedia, occasionally writing for the personal finance blog Cashzilla, and considering the possibility of there being intelligent life on Earth.
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