Analysis of 165,000 budgets of people who approached Citizens Advice for debt help revealed 8% of people, or 11% of fixed rate mortgage customers, have come to the end of their fixed rate deal and have not switched.

This means they are “overpaying” as they will be paying the pricier Standard Variable Rate (SVR).

The Financial Conduct Authority (FCA) has previously estimated that mortgage customers on SVRs could be overpaying by £1,000 a year on average. The research was last done in 2020 so this figure could be higher off the back of the recent rate hikes.

The report by Citizens Advice also found that 23% had struggled with mortgage repayments while 38% had lost sleep over their finances.

Citizens Advice highlighted that the FCA had made voluntary agreements with firms to give existing customers on reversion rates a chance to move to a new deal if they met certain criteria, but the charity said this “doesn’t go far enough”.

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It said that to avoid paying the SVR, customers needed to switch before the end of the fixed rate term, but many people did not.

Around one in four who did not switch said that it was too difficult or time consuming.

Further, 60% of people taking out a mortgage did not take the SVR into account, while a third who didn’t switch admitted they were not aware of the SVR when taking out a mortgage.

Little incentive and alternative models

Citizens Advice said there was “little incentive” for firms to compete to offer lower SVR rates to attract new customers, so those who revert to the SVR are worse off.

It noted that high SVRs would likely not comply with new Consumer Duty principle around fair value and should therefore be “addressed urgently”.

As such, it urged the FCA to explore “alternative models” to high SVRs at the end of fixed rate terms so homeowners are not overcharged.

The charity added that its evidence warranted “similar ambition” from the regulator on mortgages as it had done on insurance. This is because there had been no action taken by the FCA since 2018 on mortgage loyalty penalties since it made a super complaint on loyalty penalties covering mobile, broadband, home insurance, mortgages and savings market.

Overall, the regulator identified around £3.4bn in combined loyalty penalties, with around £800m in annual mortgage penalties.

For broadband customers, the loyalty stands at £83 a year for 1.5 million people, while on broadband, seven million UK adults are overpaying to the tune of £61 a year.

If a customer pays the loyalty penalty across all three markets this could cost £1,144 a year, equivalent to more than half of the current energy price cap. The £95 monthly cost of the loyalty penalty is equivalent to 17 days average energy use.

‘Firms help themselves instead of people in need’

Clare Moriarty, chief executive of Citizens Advice, said: “The government did the right thing by strengthening its cost of living help, but finally fixing the loyalty penalty could put more than twice as much money back in some people’s pockets as the £400 October energy grant.

“As we all pull together to weather the cost-of-living crisis, it’s incredibly frustrating to see there are still firms out there that prefer to help themselves than help the people who’re most in need.

“The time for piecemeal pledges has passed. Regulators must tackle the loyalty penalty across these three markets – no more excuses, no more delays.”