Loyalty discounts can lock you in to a bad deal

Increasing numbers of mortgage lenders are offering 'loyalty' discounts in an attempt to retain existing customers. But are you better off accepting one, or shopping around for a new deal from a different lender?

Several lenders now have preferential rates or loyalty bonuses for long-term borrowers, while others are trying to hold on to customers by offering them special 'lifetime' deals. Among the most generous discounts are: Skipton Building Society, with a 0.75 per cent discount off the standard variable rate (SVR ) for borrowers of two years' standing; National Counties Building Society with a 0.9 per cent discount after three years; Hinckley & Rugby Building Society with a 0.9 per cent discount after five years; and West Bromwich Building Society with a 0.85 per cent discount after five years. In most cases, the discounts are applied automatically (borrowers do not have to apply), and are subject to certain restrictions, such as not being available when the borrower is still on a fixed or discounted rate.

Some lenders offer deals for existing mortgage or current account customers only, or charge lower arrangement fees on certain products for existing customers than for new borrowers.

In addition, says Rob Clifford of independent mortgage broker MortgageForce, 'lenders often have "under-the-counter" deals that are not available in branches or advertised. Some have a business retention unit in their call centres that will negotiate a better deal for existing borrowers at the eleventh hour if they are threatening to remortgage.'

However, while some of the discounts are generous - a 0.85 per cent discount represents a saving of £425 a year on a typical £50,000 repayment mortgage - they are meaningless unless taken in context with lenders' SVRs. In many cases, borrowers on the loyalty rate would still be paying more than they would on the SVRs of lenders such as Egg, First Direct and HSBC.

By shopping around and remortgaging, some 4 million borrowers paying their lenders' standard variable mortgage rates could save an average of £124 a month, or £1,488 a year, according to independent financial adviser The MarketPlace. With many lenders charging SVRs of more than 5.5 per cent, while discounted rates of under 4 per cent are available for remortgagers, there are clearly big savings to be made by switching lenders.

David Hollingworth, of independent mortgage broker London & Country Mortgages, says: 'Looking at the loyalty discounts offered by lenders such as the Skipton, Britannia, and other small lenders, it's better to pay that than their SVR. However, what borrowers need to be looking at is how the loyalty rate compares with what else that lender has to offer and the rest of the market. For example, Britannia has been offering a best-buy loan fixed at 3.99 per cent for two years that was much better than its SVR minus a 0.2 per cent loyalty discount.'

Hollingworth recognises that some people don't want the outlay upfront of remortgaging, even if they would make savings over the long-term. While he thinks that approach is misguided, he suggests that borrowers who do not want to search for the best deal each time their old one expires should at least make sure that they find a good long-term deal, such as a lifetime tracker.

At Norwich & Peterborough Building Society, Gary Lacey, group product manager for savings and mortgages, says: 'Rather than offer loyalty discounts, we try to encourage longer-term borrowing with products like a 10-year fixed rate with a stepped redemption period, and a lifetime tracker.'

Standard Life Bank's Capital Reward mortgage takes a similar approach, paying borrowers a bonus of 1 per cent of the outstanding mortgage every two years, which is used to reduce the outstanding balance.

The product has flexible overpayment and payment holiday options, but it does carry a stiff redemption penalty - if the mortgage is redeemed early at any time after the first two years, the borrower has to pay a charge equivalent to twice the amount of the most recent bonus payment.