Switching Mortgages

You have bought your home at last! Unfortunately, you will share it with your mortgage lender until such a time comes that all the re-payments on your mortgage have been made. For most, those re-payments will be under a 25 year deal, but with careful management, you could get rid of your mortgage years earlier, saving yourself a huge amount of interest.

How is this possible? By re-mortgaging to a better deal, every time your deal expires.

Look at your current deal....

Before you begin searching for a new mortgage, you need to know where you stand with your current mortgage. You may know already how much you pay each month but you should also know the interest you are paying and how much is outstanding on your mortgage. If you are unsure of this information, you can call your mortgage company and ask or simply look at your latest annual statement.

New mortgages may be tied into a special rate deal and there are often penalties for moving mortgages when still in this honeymoon period. Some lenders will even charge redemption penalties after the special rate has ended. You should find all of this out before proceeding with looking for a better deal.

You will find that a lot of lenders will charge a fee for the standard closure of a mortgage (this will be on top of any redemption penalties). It's worth noting that many lenders have hiked up these fees and penalties recently in order to dissuade people from moving their business elsewhere. All these costs should be included in your sums.

Look at some new deals....

If, like most borrowers, you are paying you lenders Standard Variable Rate, you are probably paying around 2 percentage points more in interest than the cheapest deals on the market. To put it another way, on a £100,000 mortgage, you could be paying £2,000 more each year in interest than you need to.

Have a look around and see what you could save. The cheapest rates usually available are to those people with low ‘loan-to-value' rations (LTV for short). You can calculate your own LTV by taking the amount left on your current mortgage and dividing it by the estimated value of your home.

Unfortunately, as well as penalties from your existing mortgage lender, you will probably encounter fees from your new lender. There will more than likely be an application fee for a new mortgage (which could be £500 for a cheap deal) plus their legal and valuation fees. You'll notice that most mortgage lenders will charge the same fees regardless of the size of the loan. This means that people with bigger mortgages are likely to save more money.

Compare the monthly costs....

Now we have talked about all the different costs you may incur for switching lenders, lets start talking about all the money you could save. Get yourself a few different quotes and start comparing.

Remember, if you have a re-payment mortgage, rather that an interest-only mortgage, you will have to compare like with like. If you have 20 years left on your current deal, then you will need to compare this with a new 20 year deal. If you were to compare it with a new 25year mortgage, you'll get a false impression of how much you'll save, and end up taking five more years to pay off your mortgage which isn't exactly what you had in mind…..

Do your sums....

All there is left to do is the maths! You'll need to add up the costs that you'll be charged by your current lender plus those that you'll incur for a new mortgage. If, for example, both lenders charge a fee of £500 apiece it would make the total cost for switching mortgages £1000.

You will have to compare this total to your monthly saving. If you think you can save £250 a month then your re-mortgaging masterplan will pay for itself in just four months, after that, you will be £200 a month better off. Obviously, these cheap mortgage deals have a shelf life, and won't normally last longer than a few years. After which time, when the special deal; ends, you may wish to consider re-mortgaging again. It may be worth considering a longer five year deal. You'll save a bit less each month but you won't be incurring re-mortgaging costs as frequently.

Let your current lender know....

Now you have figured out the savings you could make on your mortgage, it's a good idea to talk to your current lender. Most lenders hate to loose business and so may be prepared to offer you a lower rate. Better than that, some lenders will even switch you to one of their cheaper deals without charging you all the additional fees that you'd normally pay elsewhere.

If your current lender doesn't seem bothered enough to offer you a switch, and it's cheaper for you to go with a new lender. Say goodbye to the old one!

More tricks for more savings....

There is another trick to saving yourself more money in the long run. Find a cheaper deal and aim to pay off the same each month as you are now. If you do this with a lower interest rate it will mean that you pay off your mortgage years earlier. This can not only potentially save you thousands of pounds, but it will also bring forward the day when you own your own home outright.

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