Three quarters of British consumers have committed to financial agreements without checking the terms and conditions, new research claims.
The majority of British homebuyers have signed complex financial contracts that they haven’t read or are unable to comprehend, says a new study.
Three quarters of Brits have signed contracts that they haven’t read in full, while more than half believe they have overpaid for something because the language in the contract was too difficult for them to grasp, according to a survey by online mortgage broker Habito.
What’s more, one in three have agreed to sign up to a mortgage without actually reading the terms and conditions, with almost half admitting that they had only read a quarter of the paperwork before signing it.
The survey of 2,004 adults also found that over half of British consumers are deterred from switching mortgage products to save money because of the overly-complicated small print and financial jargon contracts are written in.
A quarter of those polled admitted that they had agreed to sign a financial contract without understanding the language in it, while 46% said that they believed they had no other option.
Consumers ‘fear industry jargon’
“People are disengaged by the use of over-complicated language and industry jargon,” said Daniel Hegarty, Habito’s CEO, on the firm’s blog. “SVR [standard variable rate], fixed-term rates, introductory period, interest-only, capital repayment… the list goes on.
“No-one learns this in school. These aren’t words or phrases we use at any other time. They are unfamiliar and unapproachable. And it’s only natural to fear what we don’t know – it leaves us feeling vulnerable.
“Not understanding what you are signing up to is stressful. More than a third of people say they have had sleepless nights or been distracted throughout the day because of the stress of needing to go through a financial contract.”
‘A-Level reading age’ required to understand mortgage contracts
The contracts least likely to be read all the way through were mobile phone contracts (61%), credit card agreements (53%) and buildings insurance contracts (40%). Londoners were the least likely to sign a financial agreement without reading it, closely followed by those from the East Midlands and the South East.
Further research by the University of Nottingham’s Linguistic Profiling for Professionals department, which included tracking features such as average word and sentence length, found that the reading age required to understand a mortgage contract is that of UK school year 13, the final year of A-Levels (aged 17-18). However, the average national reading age for Brits is 12.
Consumers losing out
The consequence of signing up to and staying on confusing contracts is that it is costing consumers money. Research by Dr Peter Backus, senior lecturer in Economics at the University of Manchester, found that households with a GCSE stage reading level are staying on expensive mortgage deals for up to a year longer than those educated to A-Level standard or higher.
“My research shows that over half (55%) of mortgage holders could reduce their payments and save nearly £300 per month by switching,” says Dr Backus. “As a percentage of their current monthly payment, it’s households with an educational reading age of Year 11 (GCSE) or below, who would benefit from switching the most.
“We also see that these households are more likely to be on variable rate mortgages, leaving them more vulnerable to future changes in the Bank of England base rate.”
Government should force firms to put contracts in plain English
Almost 95% of UK home-owners polled said that they think the Government needs to regulate to make the language in financial contracts easier to grasp.
“Clearly there are many challenges as financial contracts have terms and conditions, which are not always easily explained but all too often they are provided on bland black and white pages which may seem daunting to anyone outside of the industry,” Dominik Lipnicki, director at Your Mortgage Decisions, told Mortgage Solutions.
“These percentages speak for themselves, clearly more could be done to provide clients with an easy to understand guide. I would, however, say that a good mortgage adviser will always explain the product provided in the required detail – including its limitations as well as advantages.”
Financial literacy ‘crisis’ in UK, warn academics
Last year, research by University College London and Cambridge University warned of a financial literacy “crisis”, as researchers found a third of those in England and Northern Ireland were unable to calculate the correct change from a shopping transaction – even when using a calculator.
“This new research highlights how England is facing a crisis in terms of adults’ financial literacy skills,” said Professor John Jerrim of the UCL’s Institute of Education, co-author of the working paper. “We all need to be able to conduct basic financial calculations in order to make rational well-informed decisions.
“This includes how much we should save into our pensions, understanding the financial implications of borrowing money from payday loan sites, through to whether we can really afford to buy a particular house.
“Our results bring into question how many adults in England really have the skills to make such complex financial decisions. The reality is that many adults struggle to complete even quite basic financial tasks.”
Can’t or won’t understand?
However, while the finance industry could do more to help customers understand what they are signing up for, professionals say consumers also have a responsibility to take the time to examine the fine print in detail.
“It’s important that the industry strives to make all literature as easy for customers to understand as possible, despite what can be a very technical area,” David Hollingworth, associate director of communications at L&C Mortgages, told Mortgage Solutions.
“There is a difference though between simplification of terms and customers taking the time to read the information. The drive to provide as much detail as possible can run the risk of overwhelming customers.
“Brokers of course provide an important role in helping their customers understand the key elements of their mortgage more clearly, but borrowers should still get into the detail of such a major transaction.”