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Poor Understanding of Monetary Value of 1%

Personal_Finance / Debt & Loans Nov 28, 2007 - 04:00 AM GMT

By: Nationwide

Personal_Finance Research from Nationwide Building Society reveals that 75% of people in the UK don't understand the monetary value a 1% difference in mortgage rates can make. A 1% difference in rates on a five year fixed rate mortgage deal could be worth over £4,000*. When given details of two five year mortgage deals to compare, the largest group of respondents (28%) said they thought the difference on a £120,000 mortgage with an interest rate at 5.6% compared to a rate of 6.6% would be between £500 and £2000. Another 23% said they had no idea at all. Only 25% of people correctly identified that the difference could be £4,000.


The research also showed that:

  • Men are more mortgage savvy than women. 33% of men answered correctly compared to less than a fifth of women (18%);
  • Experience counts! 31% of those aged 55-64 guessed correctly the true value compared to just 16% of those aged 18-24;
  • The South-East, Midlands and Scotland had the highest regional score. 28% percent of people in these regions knew the difference compared to their counterparts in Wales and the South West where only one in five people (19%) were right.

If by shopping around, a consumer finds a mortgage deals that saved £4,000, this could cover the costs of:

  • The majority of a household's annual council tax or utility bills: an extra £800 a year would cover a significant proportion of an average £1,100 a year council tax bill or £1,200 a year utility bills;
  • £65 extra a month towards grocery shopping;
  • £800 a year towards mortgage overpayments;
  • An extra holiday a year.

Matthew Carter, Nationwide Building Society's divisional director for mortgages, said: "People's lives are busier than ever in the run up to the festive season and, as a result, they may be less inclined to shop around for the best deal. The temptation may be to take a slightly higher rate as an easier, less hassle option. But, as our research shows, most people don't understand the impact that just a 1% difference can make, meaning they could be wasting thousands of pounds.

"We therefore urge borrowers to make time to shop around and compare the total costs over the life of a deal before making a final decision. After all, a £4,000 plus saving on a 5 year deal for a couple of hours of work is a pretty good return!"

Example of cost savings on 5 year fixed rate mortgages:

Remortgage, switcher and additional borrowing:

Lender Rate Reservation fee Monthly payment Difference in rate to Nationwide Saving with Nationwide over 5 year deal period
Nationwide 5.63% £499 £754 - -
NatWest 6.54% £699 £806 + 0.91% £3,151
Halifax 6.89% £499 £827 + 1.26% £4,393
Northern Rock 7.29% £495 £851 + 1.66% £5,832

Rates correct as at 23.11.2007

Home mover:

Lender Rate Reservation fee Monthly payment Difference in rate to Nationwide Saving with Nationwide over 5 year deal period
Nationwide 5.63% £499 £737 - -
HSBC 6.29% £499 £785 + 0.66% £2,864
Halifax 6.69% £499 £814 + 1.06% £4,642
Northern Rock 7.29% £495 £860 + 1.66% £7,363

Rates correct as at 23.11.2007

Contact information:

Zoe Stevens, 01793 655423, zoe.stevens@nationwide.co.uk
Natalie Tate, 01793 655354, natalie.tate@nationwide.co.uk

Notes:

*Based on £120,000 repayment mortgage over 25 year term.
Cost of five year deal at 5.6% = £44,645. Cost of deal at 6.6% = £49,066. £49,066-£44,645 = £4,421

Remortgage competitor comparison table - assumptions
Rates correct as at 23.11.07. Savings are based on an average loan size of £102,282, an LTV of 75%, and a term of 18 years. Any difference in reservation fee has not been included in the savings above.

Home mover competitor comparison table - assumptions
Rates correct as at 23.11.07. Savings are based on an average loan size of £118,573, an LTV of 75%, and a term of 25 years. Any difference in reservation fee has not been included in the savings above.

Full survey results:

Q. Based on a repayment mortgage of £120,000, approximately how much do you think the difference in total repayment over 5 years would be for a mortgage with an interest rate of 5.6%, compared to a mortgage with an interest rate of 6.6%?

 

 

Results by gender

 

Total

Male

Female

£500 or less 5% 4% 6%
£500 - £2,000 28% 28% 28%
£2,000 - £4,000 19% 19% 20%
More than £4,000 25% 33% 18%
Don’t know 23% 16% 29%

 

Regional results

 

South East

Midlands

North England

Wales & South West

Scotland

£500 or less 6% 4% 6% 4% 6%
£500 - £2,000 28% 27% 30% 28% 25%
£2,000 - £4,000 20% 20% 21% 15% 16%
More than £4,000 28% 28% 22% 19% 28%
Don’t know 19% 21% 21% 33% 26%

 

Results by age

 

18 - 24

25 - 34

35 - 44

45 - 54

55 - 64

65+

£500 or less 2% 11% 5% 5% 4% 4%
£500 - £2,000 35% 33% 30% 23% 27% 22%
£2,000 - £4,000 22% 17% 26% 18% 13% 18%
More than £4,000 16% 25% 22% 30% 31% 25%
Don’t know 25% 13% 18% 24% 26% 30%

http://www.nationwide.co.uk/


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