When it comes to mortgages, switching your deal could save you thousands of pounds. Now is a great time to consider switching, as according to the ONS House Price Index the average UK house prices rose by 7.6% in the year to November Link opens in a new window to reach a record high of £250,000.
The savings are particularly significant if you are on your first mortgage. You may have just recovered from the shock that you actually own a house, but the savings you could gain make it worth exploring your options. But how do you go about it? Here’s everything you need to know about switching your mortgage and saving money.
Do the maths
The first thing to do is dig out your mortgage contract and get to know those terms and conditions. Did you sign up for a lock-in period, how long do you have left on that and what are the penalties for leaving early? Chances are if you’ve got over a year left you won’t save enough to cover the early repayment charge, but it’s worth knowing.
To switch, you will want to work out how much your property is worth, how much your outstanding mortgage is and how much you are looking to pay back each month. You may face stricter checks on your income, so you’ll need to work out what you can afford. Then you can decide whether you want a fixed or tracker deal and compare the costs of fees and which incentives are included.
Once you’ve crunched the numbers, you could pick your own mortgage by using an overview from comparison websites and then checking on individual lenders’ sites. Alternatively a broker, who can advise you on the most suitable mortgage for your circumstances could be a good idea, especially if you are self-employed.
Low LTV = better deals
If your home is worth more today than when you bought it, the loan to value ratio (LTV) will be lower. Lower LTVs bring better interest rates (hurrah!) and could decrease your monthly bill. Better still, you could opt to keep your payments unchanged, potentially paying off your loan quicker.
Let's take a theoretical example. If you are on a 3.99 per cent capital and interest repayment mortgage with a £150,000 loan over 25 years, you are repaying £791 a month. If your lower LTV means you can bag a mortgage at 2.99 per cent, your payments would drop to £710 a month. But let’s suppose you decide to keep your monthly payments unchanged. Assuming a 2.99 percent deal for the life of the loan, you would pay off your mortgage three years and seven months earlier – and pay £9,908 less in interest. Remember, too, that general mortgage rates may be higher in future.
If your LTV has not improved, you may still be able to get a better deal, especially if you are on a standard variable rate and can move to a cheaper fixed-term deal.
Hidden danger of early repayment
If your mortgage deal has a fixed life, typically two or five years, and you switch before it ends, there will be an early repayment charge. It could be a hefty 2-5 percent of your loan, so you need to do your sums carefully to ensure any savings from a switch would cover the costs. There could also be a small exit or admin fee to close down a mortgage early. But if you try for a new deal with your existing lender, the early repayment charge could be shaved or (if you are near the end of the fix) waived.
Don’t forget the fees
What could tip the balance is fees. If you switch to a new two-year mortgage and (as above) you are only saving £80 a month, or £960 a year, you don’t want a deal that comes with £2,000 of fees, as they would cancel out your savings. You may also want flexibility, where overpayments can be made without any penalty, or payment holidays to free up some money when you need it most. Factor all this in and you should make the right decision for you. Happy switching!
Please be aware that your home may be repossessed if you do not keep up repayments on your mortgage.
Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.