Cost of living: Drop your loyalty, laziness and fear and save up to €5,000 a year by switching

There will be people reading this sentence who are going pay at least €5,000 more than they need to for their household bills over the next year because of a misplaced sense of loyalty, laziness, confusion and fear – or a combination of all four.

While €5,000 is a lot of money, it is virtually nothing compared to the €1.2 billion cumulatively wasted by hundreds of thousands of Irish consumers over the past four years alone by overpaying on just one of their domestic bills.

And when the money needlessly spent by people who have stuck doggedly with the same health insurance, mortgage providers and electricity and gas supplier over the past decade or so is totted up, the amount Irish consumers have overpaid easily tops €10 billion.

If that all sounds like a wild exaggeration, one need only look at the numbers.

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While the banking industry has been applauding itself in recent days for a doubling of activity in the mortgage-switching market over the past 12 months, the number of people who moved their home loan from one company to another in the past year struggled to top 1,200, a tiny percentage of almost 700,000 mortgages currently on the books of Irish banks.

That is despite the fact that many canny switchers with a typical mortgage can save themselves in excess of €4,000 a year by switching from one of the dearest lenders on the market to the cheapest.

The numbers who have switched health insurance provider does not even come close to 50 per cent and there could be as many as one million people who are paying hundreds – if not thousands – of euro more than they need to every year for what they perhaps do not realise is often a reduced level of care.

Read more cost of living advice

• Energy bills: Ten ways to save money this winter
• Pricewatch: 25 potentially money-saving tips for the winter months ahead
• It’s definitely time to have a look at how much health insurance is costing you
• Cost of living: Drop your loyalty, laziness and fear and save up to €5,000 a year by switching

Then there are the three quarters of a million Irish households which have never switched their energy provider, by every conceivable measure the easiest and most commonly used product or service to switch. By not switching, those 750,000 people have collectively spent over €1.2 billion more on gas and electricity than they needed to over the past four years, based on figures from the Commission for the Regulation of Utilities (CRU).

Why not switch?

So, what is the problem? We know switching saves money, so why do more people not do it?

Several years ago, a unit of the Economic and Social Research Institute (ESRI) headed by behavioural psychologist Dr Pete Lunn gave itself the task of finding at least part of the answer.

The results did not make for happy reading. The study showed that when a single additional factor, alongside price, is used to describe two comparable products, consumers struggle to identify which is the best value for money.

And if four factors are used in a product’s description – interest rate, term of loan, bank opening hours and the promise of a free teddy bear, for example – as well as the price, people have virtually no chance of being able to work out accurately which is the best value.

The study also revealed systematic biases in consumers’ choices, with most people assuming high-end products are better than cheaper ones, even when the available evidence makes it clear the dearer options are overpriced.

Fast forward to today and Lunn remains sympathetic to people who do not switch. He points to an understandable “fear of making a mistake” when choosing between products and says that fear is important because it can stop people making the wrong choices.

It can also, however, stop people making the right choices and Lunn notes that “a good proportion people start the switching process and discover obstacles”. And when they discover those obstacles they take fright and stay where they are, often to their detriment.

“Many people don’t accurately perceive the size of gains,” he says adding that “there is often a lack of price and product attribute transparency – ignorance or not, it is really hard to assess product quality and price for insurance and mortgages.”

Health insurance

Dermot Goode is a health-insurance broker with totalhealthcover.ie and his bread and butter is the switching market.

“For many people it is fear and, typically, it is the older cohort who are more exposed,” he says. He also points to a degree of “inertia and misguided loyalty”.

He says the under-50s tend to be “very mobile and are getting even better at switching but older people who have been with the same company for many years can be overpaying by as much as 40 per cent each year.”

The Health Insurance Authority (HIA) also looks at switchers and recent research it conducted pointed to reasons people give for not switching which include too much hassle, too difficult to compare plans, not enough savings to be made and being satisfied with their current provider.

Half of Goode’s time is spent “helping people to get over the mental obstacles to switching” and he says that “even the ones who actively look at switching can struggle, particularly when they go online or use call centres. All it takes for someone not to switch is a seed of doubt.”

He suggests that the “stark reality is that there are people who are on dated schemes that could be saving €1,000 per adult each year and in some cases get better cover into the bargain”.

Gas and electricity

Whatever about the differences in the products offered by health insurers, there is absolutely no difference between the products offered by gas and electricity companies apart from price, with discounts routinely offered to new customers for the first year after a switch after which prices always rise to the highest rate.

According to the CRU, Ireland has one of the highest switching levels in Europe but even so, only 16 per cent of people regularly switch gas providers and only 14 per cent regularly change electricity providers.

Based on its most recent data, active customers who switched supplier or renegotiated with their current supplier every year for the past four years could have saved €704 on gas, €1,097 on electricity or €1,696 on their dual-fuel costs.

Karl Richardson from the CRU points to research showing that consumers face difficulties in comparing the many types of offers advertised by suppliers. “To help customers be confident that they are choosing the best offer available, suppliers are required to include an Estimated Annual Bill in marketing material.”

He says “customer should be receiving at least one of these prompts during the duration of a contract with any supplier. If they do not, we want to hear about it.”

“There’s a large cohort of people who may not have switched in years, or even ever,” says Daragh Cassidy of price comparison and switching site bonkers.ie. “And these people are definitely overpaying for their energy.”

He gives three reasons for people not switching – fear, lack of knowledge about savings and inertia.

“People fear they may be left without power during the switch. This is practically impossible,” Cassidy says. “You’re only switching supplier. Unlike with broadband, you’re not switching network. There’s only one national electricity network and one gas network. At worst, a failed switch means you just end up with the same supplier. In which case just, start the switch again.”

He also suggests that people “often don’t realise how much they could save. As gas and electricity are pretty generic products, I think some people assume everyone is charging about the same. But this couldn’t be further from the truth. Discounts of 40 per cent or more are on offer for an entire year to those who switch.

“Sometimes people don’t care that they’re overpaying – whether it be for energy, broadband, their mortgage or their mobile. They’re reasonably happy. And an inertia just sets in. And this type of behaviour is difficult to change.”

Mortgage switching

The biggest savings can be made by mortgage switching, where activity is at its lowest.

There are just over 740,000 households in Ireland with a mortgage, with an estimated 220,000 of those on standard variable rates of up to 4.5 per cent.

A recent Central Bank review of mortgage-switching activity found that 61 per cent of eligible switchers could save over €10,000 but that 13 per cent stand to gain over €30,000 in present-value terms.

“Many mortgage holders are unaware of the large savings that can be made by switching mortgage,” says Martina Hennessy, the MD of mortgage brokers doddl.ie. She says internal research her team has carried out suggests many homeowners could save €4,388 each year, a figure which is based on an average mortgage of €272,000 over 25 years, simply by moving from Bank A to Bank B.

“We need to normalise mortgage switching,” she argues. “Mortgage holders are sometimes afraid to switch their mortgage or even query a better rate with their own provider for fear it will impact their current position or home. When you have a mortgage, you are in control: you can decide if you want to switch and it does not impact your home. Switching is merely a transaction to move from one lender to another to save on interest.”

She notes that buying a home is a stressful time and involves securing a mortgage and bidding in a dysfunctional market. “Many people associate their mortgage with the overall home-buying process and are reluctant to revisit their mortgage as they perceive it to be too difficult or complex.

“We need to really change how we view our mortgages, which for many are their largest financial outgoing. If you are going to look to make savings as a household, then your mortgage is the first place to start.”

According to Cassidy Irish people “also have a morbid fear of being seen as tight-fisted. So being careful with your money and shopping around is almost seen as a bad thing by us. And this is one of the reasons why everything here costs so much – we’re afraid to seek out and demand better value.”

Switching: the numbers*

Health Insurance

61 per cent have never switched health insurance providers.

35 per cent have switched, with the majority of these doing so only once.

18 years: the average number of years for having a policy

13 years: the average number of years with the current health insurance provider

56 per cent have kept their level of cover the same over the past two years

30 per cent: the level of savings that people say would be required to encourage them to switch

Utilities

In April 2020, 17,843 households switched electricity. In April 2021 it was 25,017. And in March 2022, it was 40,575.

€1,696: the savings on dual fuel costs for someone who switched supplier or renegotiated with their current supplier every year for the past four years

* Figures from HIA and CRU