MORTGAGE borrowers could overpay bills by hundreds of pounds as a result of a clause buried in the small print of a major lender, experts have warned.
Homeowners on a tracker mortgage usually see their monthly repayments fall if the Bank of England base rate is cut.
Earlier this month the key rate was reduced to 4.75% from 5% meaning that if, for example, your mortgage rate had been 3.5% it would move down to 3.25%.
The majority of lenders will automatically pass on the 0.25% percentage point reduction either immediately or within the next month.
Yet, Yorkshire Building Society, a company with millions of customers spread across different brands, operates a different policy which experts say is “outdated”.
Borrowers on tracker mortgages with Yorkshire Building Society or any brands owned by the company, including Accord Mortgages, Chelsea Building Society and Norwich and Peterborough Building Society must instead contact their lender and ask for their payments to be “recalculated” to immediately see a reduction.
If a customer fails to do this, their bill will not change until March 2025.
Nicholas Mendes, mortgage technical manager at broker John Charcol, said: “This delay can cost borrowers hundreds of pounds over several months.
“Accord’s approach appears to reflect the outdated annual review process, which was common in the 20th century. While the actual interest charged reflects rate changes immediately, payment adjustments are delayed until an annual review…
“The modern norm for tracker mortgages is to align monthly payment changes with base rate adjustments, ensuring borrowers experience the financial effects promptly.”
At a time when millions of families are hard-pressed, the policy could see a customer could be paying a higher interest rate for an extra five months.
On a £300,000 mortgage over 25 years with a tracker rate of 5%, their monthly payments would be approximately £1,753.77, according to calculations by Nicholas.
But if the tracker rate is 0.25% points lower at 4.75%, their monthly payments would decrease to £1,710.35.
That means an extra £43 a month, or £215 over five months.
The bigger the mortgage, the more you are set to overpay, meaning some borrowers could pay thousands of pounds extra.
Commenting on the issue, Chris Sykes, technical directior, at broker Private Finance, said: “Awareness needs to be raised on this immediately so borrowers can save money.”
Nicholas from John Charcol added: “Tracker mortgages offer flexibility and cost-saving potential, but understanding the small print is essential.
“It is important to review the terms of your mortgage agreement for details on rate adjustment timing.
“For lenders such as Accord, borrowers should act proactively and request payment recalculations immediately after a rate reduction.”
A spokesperson for YBS said that customers are told about the process and are sent letters informing them that they can choose to update monthly repayments sooner.
They said: “Our mortgage payments are adjusted through an annual review process and we outline this to customers when they take out their mortgages with us.
“On December 31 each year, customers’ payments are recalculated to reflect any interest rate changes which have occurred in the preceding 12 months. This approach provides stability and certainty of monthly payments for customers and is an approach adopted by several other lenders in the market.”
“We write to customers after each base rate (or standard variable rate) change and give them the option to request an immediate recalculation of their payments if they prefer.
“If they stick with the annual review, changes are applied to their monthly payments from the following March.”
The building society added that overpaying in the short term could save cash in the long term, and that if rates go up it means borrowers have more time to prepare for higher repayments.
They said: “Whichever option they take, customers pay the correct amount of interest overall, and if the base rate goes down and they decide to maintain their payments until their annual review date, they actually save more than they would have done from the base rate cut alone because of the compounding effect of the overpayments within that year.
“If the base rate increases during the year, customers can benefit from time to prepare for the payment increase to come on their review date, or can choose to revert to the higher payment immediately should they prefer.”
There are around 643,000 homeowners on a tracker mortgage, according to data from trade body UK Finance.
These deals don’t have a fixed rate instead monthly bills can change over the duration of the term.
Most tracker mortgages move either up or down when the Bank of England changes.
But each lender has different terms of conditions around when rate reductions are passed on, making it crucial to check the details of your deal.
The flexibility is one of the main draws for borrowers on these mortgage deals.
It’s often a better option if you are expecting to move in the near future as you will often be able to repay the deal without paying expensive exit fees.
And if you think the base rate will continue to fall a tracker mortgage, which moves down in line with it, could be a good option.
However, this is essentially a gamble as no one knows for sure what rates will do.
You can usually choose to lock into a fixed rate at any time if you believe that rates won’t go any lower.
Repayments on fixed-rate mortgages won’t change throughout the duration of the deal.
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
