Should You Switch Your Mortgage Deal Mid-Term?

If you feel you're paying too much interest on your mortgage it's easy to think that switching to a deal with a better rate will save you lots of money, but things are never that simple. Here's what you need to know before you switch mortgage mid-term.

When can I switch mortgage deal?

If you are considering moving to a mortgage deal offered by a new provider, you can do it at any time. However, it's not as straight forward as simply looking for an alternative that charges interest at a lower rate than you're paying at the moment, particularly if you're tied in to a fixed term deal with your current provider.

That is, though you might well be able to find a number of mortgage products that advertise a much lower rate of interest than your current deal, there are a whole host of one-off costs associated with moving your mortgage that you will need to consider before you can be certain that switching will save you money.

I want to switch mortgages, how do I go about finding a better deal?

It is vital that you compare your current deal with any you might consider switch to – and look beyond the headline interest rate. To really understand whether a new mortgage deal will leave you better off, you have to look at the total cost of the deal across its lifetime (so, over two years for a two year fixed mortgage deal, and so on), plus the cost of switching.

What one-off costs am I likely to incur?

There are a number of costs to take into consideration, including:

• Early repayment charge:
  Most fixed term mortgage deals will apply a penalty - usually refered to as an early repayment or redemption charge - if you clear the balance (which is effectively what you do when you switch to a new provider, mid-term) before a certain date. Any redemption penalties will be set out in your mortgage terms and conditions and are likely to be either a certain percentage of your outstanding mortgage balance or a fixed fee.
  
  If you're thinking about switching mortgage deals mid-term, finding out what your existing lender would apply in the way of an early repayment charge is the first step to determining whether you would actually be able to save by moving your mortgage.
   
• Product fees:
  Most mortgage lenders charge an up front, one-off product fee when you apply your mortgage application – supposedly to cover administrative costs. This fee will be set out in the product information and may be a flat fee or a percentage of the loan amount.
   
• Legal fees:
  When moving to a new mortgage lender, you will incur legal costs as you will need to appoint a solicitor to handle conveyancing (everything from arranging local authority searches and valuation surveys to liaising with the mortgage companies over the completion dates and the transfer of funds).
   
• Valuation fees:
  If you decide to switch it's likely that you will also have to pay for a valuation of your property to be carried out before your potential new mortgage provider will approve your application.

So, how do I work out whether it is worth me moving to a new deal?

In simple terms you should:

• Look at the cost of the new deal over the course of the mortgage term (i.e. two years for a two year fixed mortgage) – be sure to research and include the costs outlined above. The simplest way to do this is to contact the provider and ask for an illustration (you will first need a redemption quote from your current lender in order to get an accurate illustration).
   
• Work out how much you would be able to save over that period, by comparing the total cost of the new mortgage with the amount you would pay out during that time if you stuck with your existing deal.
   
• If you would still save money, it might be worth switching deals.

How do I go about finding the right mortgage deal to switch to?

You need to follow these steps:

1. Ask your current lender for a 'redemption quote':
   A redemption quote will tell you how much you currently have outstanding on your mortgage; add any redemption penalties that would be due if you paid off the mortgage early on to this amount. This figure will then tell you how much you would need to borrow in order to pay off your mortgage and move to a new lender mid-way through your fixed deal – if that is what you decide to do.
    
2. Shop around for the best deals on the market:
   It always pays to shop around. To make your search for a ‘bargain’ easier, think about your requirements – for instance:
   
   
   • Loan to Value (LTV):
     This is essentially a comparison between the amount you want to borrow and the value of your home. As a general rule of thumb, the lower the LTV, the better the mortgage deals that will be available to you.
      
   • Type of deal:
     Most people these days go for the safe option of a fixed rate mortgage (the same interest rate throughout the deal, which means predictable monthly payments), however, other options such as trackers, discounted rate, capped, offset and current account mortgages do exist.
      
   • Interest rate:
     Obviously, this is one of the most important elements of your search as, a higher interest rate means higher monthly payments.
      
   • Other costs:
     Check things like product fees – as a high product fee could wipe out any savings you would make by securing a lower interest rate.
      
3. Come up with a shortlist of possible deals, then work out their true cost:
   The point of shopping around is to give yourself some options, and then assess which would work best for you. It's a good idea to select a number of ‘possibles’ based on the product features that are most important to you (but make sure they are products you are actually eligible for) and then work out their total cost over the course of the deal. 
   
   A potential lender should be willing to provide you with an ‘illustration’ setting out the total cost of a new deal – including interest and repayments as well as any up-front fees associated with securing the mortgage deal before you formally apply. However, do remember to add any redemption penalties associated with your existing mortgage to the overall cost of switching.
   
   Looking at total cost like this is the only way to really understand which is the best deal for you – for instance, a deal with low interest rates but very high up front products fees might actually cost you more than a deal with less attractive interest rates but far lower fees - and ultimately whether it really is worth switching at all.
   
   If you're not sure where to start with this then seeking advice from a independent, whole of market mortgage broker is a good idea as they'll be able to help you to work out your options.
    
4. Start the application process:
   If you find a deal that you are happy with and which will save you money even after all the relevant costs have been factored in, it is time to start the application process. You can often simply apply online or over the phone, though if you prefer (and if the lender has high street branches) you can do so in person. If your initial application is successful, the lender will make you an ‘in principle’ mortgage offer – basically this means your application has been successful, provided that the information you provided in your application is accurate.
    
5. Appoint a solicitor:
   At this stage, you will need to find a solicitor you trust to handle liaison with your current and proposed mortgage lender, as well as oversee the application process (conveyancing). This will include organising a valuation of your property and carrying out the legal work required to transfer your mortgage to a new lender (for instance the local searches and the transfer of title deeds).
   
   Your solicitor will also handle the transfer of funds between your existing and new lenders to pay off your existing mortgage. Part of that process is to agree with the lenders a date for your new mortgage deal to commence. Although your solicitor will handle these arrangement for you, remember that most mortgages add interest on a set day during each month. Find out when your lender calculates and adds interest each month and be sure to complete your mortgage switch before then.

   NOTE – Some lenders will include free conveyancing as part of the mortgage deal. Whilst this is not necessarily a bad thing, it’s important to remember that a solicitor appointed in this way will be working on behalf of the lender, not you.