Switching your mortgage

There are a number of reasons to switch your mortgage, including to get a better deal, release equity or get a more flexible mortgage. Here’s how to do it and what you need to consider.

Switching your mortgage – or remortgaging – involves taking out a new mortgage deal on your existing home to replace your old deal. You can either switch with the same lender or move to a new one. Lenders offer specific deals for remortgaging with a range of incentives to encourage you to switch to them.

Why switch mortgage?

Below are the main reasons for switching your mortgage. The one that applies to you will determine what you need to take into account when you look for a new deal. 

If you have an interest-only mortgage and want to switch it to a repayment mortgage so that you are paying off the loan as well as the interest, you can usually apply to your lender to do this without remortgaging. Bear in mind that your monthly payments will go up.

In some cases it may also be possible to switch from a repayment to an interest-only mortgage although your lender will want to make sure you have a plan in place to repay the loan at the end of the mortgage term.  

To save money when your current mortgage deal ends

This is probably the most common reason for remortgaging. Lenders win your business by offering you a lower interest rate at the beginning of your mortgage – usually for 2, 3 or 5 years or sometimes 10. This could be a fixed, tracker or discounted rate. At the end of the introductory deal your rate goes up to the lender’s standard variable rate (SVR), which could be around 1.5 to 2.5 percentage points more than your initial rate. 

For example, if you have a 2-year fixed rate mortgage of £170,000 at 2.06% you’ll be paying £726 a month but once your deal ends you could be paying your lender’s standard variable rate of 4.09%, when your monthly repayments would go up to £892 – a jump of £166. This would cost you almost £2,000 extra over a year than your initial deal.

By switching to a new deal, which you may be able to get at a lower rate than your original deal as your mortgage may have shrunk compared to the value of your property, you can avoid this jump. However, the deals you can get will also depend on the mortgage market and your financial situation at the time. 

If you can afford to at this point, you could also reduce your mortgage term to pay it off early. And if you had a variable deal before you may want to fix your interest rate to give you more certainty about what you will be paying each month.

There are normally early repayment charges (ERCs) to switch your mortgage during the initial deal period but once this ends you are free to remortgage with only set-up, admin and legal fees to pay. Make sure you take all these costs into account before deciding which is the best deal to switch to as they will reduce your overall savings.

Bear in mind that if you only have a small amount left to pay on your mortgage it may not be worth switching.

To release equity

If you need cash – to pay for a building project on your existing property, for example – remortgaging to borrow more is one way to do it. 

This lets you borrow a large amount at a lower interest rate than you would pay with a personal loan or credit card although you may end up borrowing the money for a longer term so paying more in the long run. Your monthly payments will be more affordable though. 

Make sure you have no early repayment charges to pay before you do this. These range from 1% to 5% of the outstanding balance so can add up to a significant amount. The percentage usually reduces the closer you are to the end of the initial deal period but paying just 1% on a £170,000 mortgage would still cost you £1,700.

If you need to borrow more it’s a good idea to wait until you are at the end of your deal and would be remortgaging anyway although you may be able to borrow the money from your existing lender at any time when ERCs wouldn’t apply. 

Whether you can increase your mortgage depends on the size of the loan as a proportion of the property’s value (known as the loan-to-value or LTV), which the lender will check by carrying out a valuation of your property.

You probably won’t be able to borrow more than 90% LTV although there are a few lenders that might go higher than this. Also, the lower your LTV the lower the interest rate you’ll pay.

To get a more flexible mortgage

Although many mortgage deals let you overpay by limited amounts you may want to switch to a more flexible deal or an offset mortgage, which offsets your savings against your mortgage so you pay interest on less. This lets you pay your mortgage off early and save on interest.

To consolidate debts

If you have a loan, credit card or other debt, you could remortgage to borrow more at a lower rate than you are currently paying on your debts to pay them off. Although this could reduce your total monthly repayments, adding your debts to your mortgage means you’ll be paying interest on them for the life of the loan, which could cost you more in the long run so you should explore other ways to clear your debts first.

How to change mortgage

If you’re remortgaging because you’re coming to the end of your existing deal, you should start thinking about it three months before to give you plenty of time to do your research and go through the application process to give you a seamless transition between your old and new deals. It usually takes between four and eight weeks to remortgage once you apply although it could be quicker if you’re staying with the same lender.

First check the terms of your existing mortgage and exactly how much you are currently paying. Then, shop around for the best deals, either by using mortgage comparison sites – look at more than one because they won’t all give you the same results – or speaking to a mortgage adviser

It’s worth checking what your current lender can offer you beforehand – they will write to you when you’re approaching the end of your current deal with new offers – and also seeing whether they can match any new deals you’ve found. 

An independent mortgage adviser will be able to look at the whole market to find the best product for you and many get paid through commission from the lender so you don’t have to pay a fee. By taking mortgage advice you’ll also be able to complain to the Financial Ombudsman Service if you receive bad advice.

You should compare the cost of deals based on the total cost over the introductory period including the mortgage repayments and fees as the one with the lowest interest rate won’t necessarily be the cheapest overall. 

Once you’ve chosen a new deal to switch to, either apply to the new mortgage lender yourself or send the necessary information to your mortgage adviser to apply on your behalf.

If you’re remortgaging to a different lender you’ll need a solicitor or conveyancer to carry out the necessary legal work.

Switching mortgage deals with your current lender

If you decide to take out a new deal with your existing lender, this is likely to be a quicker and more straightforward process than moving to a new one as it’s a product transfer rather than a full remortgage.

Your current lender already has a lot of the information about you it needs so there will be less paperwork involved. You could end up paying less in fees as there is no legal work to do and another full valuation might not be needed. There is also often an exit fee to pay if you close your mortgage account with one lender to move to another but this would not apply.

It might be easier to get a new mortgage approved with your current lender if you have a track record of making your repayments to it each month, especially if your financial situation has changed since you took out your original mortgage. You’ll also be able to change your deal without paying early repayment charges if you haven’t yet reached the end of your introductory deal.

Should you change mortgage provider?

It may be tempting to stay with your existing lender to make the process easier but you might not be getting the best deal if you do. Whether you should change to a new mortgage lender depends on the deals being offered at the time. 

You could save hundreds or even thousands of pounds over the period of your new mortgage deal by choosing the cheapest versus a more expensive one. Speaking to a mortgage adviser will help to make sure you do.

There are downsides to changing lender – the process is likely to take longer and your chances of being accepted for a mortgage could be lower if your financial situation has changed or you took your original mortgage out before 2014, as tighter affordability checks were introduced then. 

You’ll also probably pay more in fees. However, the savings you make could more than outweigh them.

How to switch your mortgage to another bank or building society.

The process will be more involved than if you’re staying put. You’ll have to provide full details of your income and outgoings so the new lender can carry out affordability checks. It will also do a credit check and a full valuation of your property and you’ll have to pay a solicitor or conveyancer to carry out the legal work to transfer the mortgage from one lender to another. On some remortgage deals the lender will pay the valuation and legal fees for you.

Getting a moving house mortgage

If you’re moving house you may need to remortgage to a new deal or lender if your existing mortgage isn’t portable, although most mortgages are. A portable mortgage is one that can be moved to a new property. Even if your mortgage is portable, it’s worth checking whether you could get a better deal elsewhere, especially if you won’t have to pay ERCs to switch.

Can you transfer your mortgage to another property?

Whether you can actually transfer a portable mortgage to a new property will depend on whether the lender is happy to lend on it based on its criteria and the valuation. Also, as you effectively have to reapply for your current mortgage the lender will want to make sure you can still afford it. 

If you are moving to a more expensive property you’ll have to apply to borrow more, which could be at a higher rate.

9th October 2020