Targeted communications with mortgage borrowers can help to improve uptake of refinancing opportunities

• Central Bank research highlights the benefits for consumers of adapting communications to take account of insights from behavioural economics.
• Notifications to mortgage holders were adjusted to include clearer information on refinancing opportunities, which significantly increased refinancing activity.
• Findings are directly relevant to the duty to secure customers’ interests, as currently discussed in the Central Bank’s Review of the Consumer Protection Code.

The Central Bank of Ireland has today (8 December 2022) published an Economic Letter, “Interrupting Inertia: Evidence from a Mortgage Refinancing Field Trial”, authored by Shane Byrne, Kenneth Devine, and Yvonne McCarthy. The Letter outlines the results of a study undertaken by the Central Bank to determine whether certain changes in communications with mortgage holders might boost engagement with refinancing opportunities.

Under the Consumer Protection Code, mortgage lenders are required to inform variable rate mortgage holders about other, lower-cost mortgage products that are available. This should be done when interest rates change as well as annually. Borrowers whose fixed rate term is nearing its end are also required to receive such information.

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.
• Testing alternative approaches within a randomised controlled trial is a valuable tool to establish what works best for consumers in the real world.
• The strongest performing communication increased refinancing activity among mortgage holders by 76% when compared against the pre-existing standard notification.
• Adding a reminder letter is especially impactful in driving increased refinancing rates. The addition of personalised euro savings estimates can help 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.

The findings underline the value of using behavioural insights to inform policy design, and the role such insights can play in addressing important issues in financial product markets.

Speaking to the BPFI Mortgage Market Council on Tuesday 6 December, Central Bank Director of Financial Regulation – Policy and Risk, Gerry Cross, noted that the research “provides the basis for lenders to make enhancements to the way they communicate mortgage refinancing information to customers.”

Discussing the findings, he continued, “Firms should therefore consider their overall approach to communicating mortgage refinancing-related information, to make sure it supports customers to make effective, timely, and informed decisions. In doing so, a firm’s overall approach should be 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 well-being.” Mr. Cross said, “Firms acting in the best interests of customers includes lenders focussing on ensuring that borrowers are effectively informed of better mortgage terms which might be available to them.”

He concluded, “For our part, we will of course be incorporating the findings of this research in our considerations in our review of the Consumer Protection Code.”

Notes to Editor

In 2020, the Central Bank partnered with a large retail bank to carry out the study detailed in this Letter. A sample of approximately 12,000 customers was divided into seven sub-groups, with six of the groups receiving enhanced letters developed by the research team and the seventh receiving the standard letter.

Economic Letters – full series

Consumer Protection Code Review