Switching Your Mortgage? Look Before You Leap

Summary
A comprehensive review of the steps you should take before switching to a new mortgage. How will you repay the loan….how much will it cost….choosing the term….savings are not everything

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The cheapest deal is not always the best. You should tailor your mortgage to suit your personal circumstances, as well as considering what special features might be appropriate, like flexibility.

Mortgages can be switched regardless of whether they are an interest-only or repayment.Generally people switch to a similar type of repayment mortgage as they had before, but it is simple to change to a completely different type of mortgage if you wish.

A typical example would be when someone has a shortfall on an endowment mortgage and takes the opportunity to switch all or part of their borrowing to a repayment mortgage

Switching mortgages may incur a charge, so it would be prudent to request a redemption statement from your lender. You will then know how much you owe on your present mortgage and the fee you will be charged for switching.

• Early repayment charge: if it applies, the mostly expensive cost of switching is the early repayment charge(ERC), which could run into hundreds or even thousands of pounds. A very high charge would cancel out the advantages of switching to a lower interest rate. If you are paying a capped, discounted or fixed rate you are likely to incur an ERC, which is commonly referred to as a redemption penalty.

• Interest charges On switching a mortgage you may be charged interest until the month end. You are in danger of paying interest on both the old and the new mortgages, so it is prudent to instruct your licensed conveyancer or solicitor to make the switch at the month end.

• Other charges Charges will be made by the lender for such things as administration, deeds, discharge and sealing. The total cost varies but normally they work out at around 50 to 300 pounds.

A good move is to contact your existing lender before switching to a new one, as they may be able to offer you an improved package. Once you have shown them full details of the mortgage you are planning to switch to, try to negotiate a better deal. A new valuation is not required unless you wish to borrow more, and there is no need to instruct a solicitor if you are using the same lender.

There are other things to take into account besides savings. You need to consider any penalties, which your new deal may have, as the cheapest deals often attract high, long lasting penalties. You may decide that smaller savings are worthwhile in return for greater flexibility, thus enabling you to switch again in the future without incurring substantial penalties.

We suggest that you look at how long your current mortgage has to run before choosing the duration of your new mortgage. Say you are only five years into a twenty five year mortgage, then it would be prudent for your new mortgage to have a term of twenty years.

The temptation is to increase the term of the new mortgage so that the repayments are manageable. This applies particularly when you are increasing the size of your loan, but we recommend that you think hard before doing so and seek professional advice.