Summary
The pros and cons of switching your mortgage are analysed. The reasons why remortgaging has become less popular are reviewed. Advice is given on sourcing the most attractive deals, if you decide to remortgage.

Switching Your Home Loan …..To Do Or Not To Do?

There has been a considerable drop in re-mortgage levels over the past few months.

I wonder why.

Nowadays mortgage deals, like the two-year fixed rate and the three-year tracker, run for fairly short terms, which result in a constant churn of borrowers. This continuous flow of re-mortgagors has been the life blood of the industry over the past few years.

However, recently people have decided not to switch once they reach the renewal date of their mortgage, which has stemmed the growth in lending.

This trend has been a double whammy for lenders, as re-mortgages are comparatively low risk and are low loan-to-value, which is just what the lenders want.

Many borrowers have realised that remortgaging no longer saves them money at the moment. SVRs are more attractive, as they are cheaper than new deals. When a fixed rate mortgage comes to an end, it automatically reverts to the SVR of the lender, which has been an expensive option in the past, as better deals could be sourced through re-mortgaging.

Now following dramatic cuts in base rates and great political pressure, lenders have been forced to reduce their SVRs, which on average now stand at 4.99 per cent

However lenders have increased their profit margins on new deals. Every time rates are lowered, some premiums are reduced, but not always by as much as the rate cut.

You will find that, when you come to re-mortgage, the SVR of your lender looks more attractive than other deals you could switch to. Our partner, Moneyfacts, reports that the average SVR of 5.05 per cent is lower than an average two-year fixed rate mortgage, whilst the average tracker rate comes in even lower at 4.11 per cent.

There is also the cost of switching to take into account. By reverting to the SVR of your own lender, you pay nothing and you are not tied to paying early repayment charges.

By remortgaging to a tracker or fixed rate, you will be obliged to pay an exit fee to your lender for leaving the mortgage, which will typically cost you around 250 pounds. Your new lender will then charge you mortgage arrangement fees, amounting to between 100 pounds and 2,500 pounds, depending on the type and size of mortgage you require.

High LTVs

For high loan-to-value (LTV) remortgagors, who have very little equity tied up in their property, the argument is even more compelling.

A homeowner, who has less equity in his property, is considered to be a high risk to lenders, so he is charged more to offset this risk. Consider this example. Whilst an average SVR is 4.99 per cent, for those with only 10 per cent equity in their house, an average two-year fixed rate is a staggering 6.29 per cent. To add insult to injury, two-year tracker rates are not available at this level.

On a 150,000 pound mortgage, having a 6.29 per cent fixed rate, the cost would be 993 pounds a month. Those lucky people with a 3.5 per cent SVR will pay just 751 pounds a month, or 5,808 pounds less taken over two years.

Of course the big difference between an SVR and a fixed rate deal is that the rates for the former are variable, whereas they are fixed for the latter. .

If you are fortunate enough to have lots of equity tied up in your home, then we advise you to shop around for a more attractive deal than the SVR offered by your own lender. For those who have more than 25 per cent equity, the market place is far more competitive.