Financial alienation: The cost of not understanding complicated documents

One in four people has committed to a financial agreement without fully understanding it.

That’s according to online mortgage broker Habito, which has carried out research that uncovers the financial fallout from the overly complicated documents customers are expected to read every time they apply for a new product such as a mortgage.

More than half of the adults they surveyed said they believed they had overpaid for something because the language in the contract was unnecessarily complicated. Perhaps worst of all, 58 per cent of mortgage-holders questioned said they had put off switching their mortgage because of the complicated language and small print used in the contracts.

That has a real financial cost. A study last year from L&C Mortgages suggested that 58 per cent of mortgage-holders had never remortgaged in order to save money, despite being able to save an average of £216 a month by switching to a better deal.

And if the language being used to define these products makes it harder for people to make such substantial savings then that risks leaving them trapped within uncompetitive products, paying inflated prices.

University of Nottingham business unit Linguistic Profiling for Professionals (LiPP) has shown that the reading age for mortgage contracts is Year 13, or A-level, potentially leaving the substantial number of people who have not achieved that reading level at a serious disadvantage.

Paula Higgins, chief executive of the HomeOwners Alliance, suggests this language is intentionally designed to disempower customers.

She said: “It is shocking that mortgage lenders are boosting their profits by billions of pounds by pulling the wool over their customers’ eyes. It is time for the industry to stop forcing homeowners to sign tortuous contracts that only lawyers can understand.”

It’s not about intelligence, of course, but rather about painfully complicated small print and information. No matter what your level of education, complex information presented using jargon is offputting and risks stopping customers from reading or understanding vital information.

Apathy or disinterest in small print probably plays a significant role too. Last year the Manchester-based wifi firm Purple inserted a joke clause into its terms for two weeks, resulting in 22,000 people unknowingly signing up for cleaning toilets and “manually relieving sewer blockages”.

And it’s not just mortgages or wifi, it’s many financial products. Research carried out by the University of Nottingham shows that some insurance policies require a PhD-level of education to fully understand them.

The researchers suggest that the required reading age cannot be the only measure of whether a document is clear – texts with relatively low reading scores can still be unclear. However, they highlight that in parts of America, loan contracts cannot require customers to have a reading ability higher than seventh grade, ie.12 years old.

Betul Korkmaz is a senior business intelligence analyst at an international education company. She bought her London flat on a shared ownership basis 10 years ago, initially buying 30 per cent.

“I knew nothing about mortgages and I just took whatever I could get,” she says. “I was mainly just happy to be accepted by someone. But more recently, I got an email all about money-saving, saying that interest rates are low right now and I thought that it was a good time to sort a low-rate mortgage for the future.

“For that whole time, I had just being paying back the interest on the mortgage, not the mortgage itself. This meant that my monthly payment was quite low, but when I looked closer, the actual interest rate I was on was really high. I also wanted to own more of my home, so I decided to increase my share by staircasing to 70 per cent, and then sort my remortgage.”

She was paying £1,200 a month but struggled to remortgage to a better rate until she used Habito’s purposefully jargon-free approach. “Even though I had had a mortgage before, I was still unsure about all the specific language and jargon, so when I spoke to other brokers and banks, I found it hard to understand what they were saying.” Moving to a better deal saved her a substantial £440 a month.

For many people, however, the issues go beyond the language used and the numbers themselves are a stumbling point. A study in March by researchers from University College London and the University of Cambridge last year warned of a “crisis” in financial literacy, with a third of people in England and Northern Ireland unable to work out the correct change from a shopping trip.

Co-author John Jerrim, of UCL’s Institute of Education, told The Independent: “It’s particularly worrying considering the low interest rate at the moment – people are buying houses they can’t afford if interest rates go up.

“There’s a direct link between basic financial literacy and being able to make big financial decisions, such as knowing the implications of getting a mortgage with a certain interest rate. People can end up having quite a financial shock.”

The problems caused by a lack of numeracy could be compounded by the high levels of literacy needed to fully comprehend financial contracts.

Perhaps small print is full of complex jargon and difficult-to-comprehend terminology because providers intentionally make it difficult to switch. Perhaps those who write it have simply not given any thought to its readability.