Irish banks could help many mortgage customers save thousands of euro simply by making the options on the table at key moments clearer, according to new research from the Central Bank.
The study suggests that when banks actively sought to provide greater clarity to mortgage holders the percentage of customers who sought more favourable refinancing options jumped by up to 76 per cent. It reported that a customer moving from a higher rate to a more favourable one would save well over €1,000 in the first year after making the switch, with the savings potentially continuing for the lifetime of the loan.
Under the Consumer Protection Code mortgage lenders are obliged to inform variable rate mortgage holders about other, cheaper mortgage products that are available, with the rules making it clear that this information should be provided when interest rates change as well as annually.
Borrowers whose fixed rate term is nearing its end are also required to receive such information.
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The Central Bank sought to understand whether changes to the language used in these letters might encourage more consumers to engage with refinancing opportunities. The changes were designed to address a number of behavioural biases that have previously been shown to inhibit engagement with refinancing opportunities, including inattention, present bias and procrastination.
The research shows that adapting communications to take account of insights from behavioural economics can be highly impactful in delivering better outcomes for consumers.
It also found that testing alternative approaches within a randomised controlled trial is a valuable tool to establish what works best for consumers in the real world, with the strongest performing communication increasing refinancing activity among mortgage holders by 76 per cent when compared against the pre-existing standard notification.
The Central Bank found that adding a reminder letter was especially impactful in driving increased refinancing rates, while adding personalised euro savings estimates helped borrowers in making the most informed choices.
Among those borrowers who did refinance their mortgage, average savings of €1,209 were achieved just within the first 12 months.
Low rates of refinancing have implications for the repayment burdens carried by borrowers, as well as the transmission of monetary policy. They can also be a potential barrier to competition. The findings of this research demonstrate how small changes can make a considerable difference in stimulating consumer engagement and interrupting inertia in this important aspect of household finance.
According to the Central Bank’s Gerry Cross the research “provides the basis for lenders to make enhancements to the way they communicate mortgage refinancing information to customers”.
He said banks should consider “their overall approach to communicating mortgage refinancing-related information to make sure it supports customers to make effective, timely, and informed decisions”.
He also called on banks to modify their approaches to make their communication less about simply “providing information” and more about “seeking to support practical understanding” by the customer “so that the customer is enabled to take action to enhance their own financial wellbeing.”
