Mortgage Guide

Switching mortgages - a guide

Switching mortgages could save you hundreds if not thousands of pounds. This guide answers some common questions about switching (Updated 14/10/10).

Mortgage lenders are like any other profit-making industry: they want to retain their customers and attract new ones. For this reason, a homeowner with a good credit rating can often find a better deal when switching mortgages.

Switching mortgages doesn’t necessarily mean going to a different company – it could just mean taking up a different type of mortgage with the same lender.

We take you through some of the things you need to think about before switching your mortgage.

Will switching mortgages mean starting again with a new 25-year mortgage?

No – you can keep your original mortgage term. For instance, if you are four years into a 25-year mortgage, you can take out a 21-year mortgage with a new lender.

I can afford my current mortgage but I’m curious about a better deal – is it worth switching?

The best reasons for switching mortgages are:

• You’ve been tied into a mortgage for years but your fixed term has ended and there are far better deals around now
• You want a more flexible mortgage that allows you to pay extra or take repayment breaks
• You took out a fixed rate mortgage and interest rates have now fallen considerably
• You’re unable to meet your monthly repayments
• You’re worried your endowment policy won’t cover the capital you’ve borrowed
• You think interest rates are going to rise and you want a fixed or capped rate.

Switching mortgages can save you a lot of money but there are potential costs of switching that you need to bear in mind, such as admin charges, redemption fees, a deeds fee, discharge fee or sealing fee, and other costs. You might also incur legal fees if you need a solicitor to handle the switch, or broker fees if you use a mortgage broker.

You need to weigh up all these costs against the benefits of a new mortgage deal to decide whether you would save money overall by switching mortgages.

Should I switch to a new mortgage lender or find a new product with my current one?

Switching to a new mortgage lender may involve lots of administration and sometimes a lengthy application process. If the savings you will make are negligible, it’s often better to switch to a better deal with your current lender.

In what ways can I save money by switching mortgages?

You can save by doing any of the following:

• Switch to a different scheme with your existing lender
• Switch from an endowment (interest-only) to a repayment mortgage. This is a good idea if you don’t think your mortgage will be fully paid off at the end of its term. If you believe you were mis-sold the endowment mortgage, you can make a complaint and you may be entitled to compensation
• Transfer your mortgage to a different lender. You may have to pay a redemption fee to your current lender - especially if you are only a few years into your mortgage – but it could be worth it in the long run.
• Change your mortgage term. You don’t have to borrow for 25 years - you might want to ask your lender whether you can cut the term (saving money in interest) or extend the term (cutting your monthly repayments).
• Switch from a fixed rate to a discounted variable rate. This is more risky as interest rates can go up as well as down.

How much could I save by switching mortgages?

It’s hard to say what your savings would be, but here’s an example of how a lower interest rate can affect your finances:

"Mrs Smith" has a £100,000 standard variable rate mortgage with a term of 20 years left. She pays 6.5% interest. If she switched to a new mortgage at 4.5%, she could save £116 a month. That’s a saving of £1,392 a year.

What should I do next?

If you’ve decided it’s worth switching mortgages, your next steps should be:

• Take a look at the market to establish what’s a good deal and what’s not
• Talk to your current lender about switching to a new product
• If your lender doesn’t offer you anything worthwhile, take time to shop around and compare mortgages.
• Seek advice from a mortgage broker or financial adviser before making a decision
• Read our guide, Switching mortgages: Top ten tips

THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.