Recent weeks have seen some welcome reductions in mortgage rates, with more sub 4% products available to choose from. However, borrowers who are remortgaging this year may still be in for a significant increase in their monthly payment or so called ‘payment shock’. Many are coming off rates starting with a ‘1’ or a ‘2’, and even if they move onto a rate starting with a ‘3’, their payments will be significantly higher.
You can ease this pain by planning ahead and speaking to a whole-of-market broker who scours the market on your behalf finding the best option for your circumstances. We ask Elena Todorova and Wendy Docherty, both mortgage advisers at SPF Private Clients, what borrowers need to watch out for.
What options do you have?
If you are coming to the end of your current deal, there are several options – pay off your remaining balance; do nothing and move onto your lender’s standard variable rate (SVR); switch to an alternative product with the same lender (also known as a product transfer); or remortgage elsewhere to a new lender.
Product transfers are often quicker and less hassle than remortgaging to another lender, and you may save on fees such as legal or valuation fees. They are simpler, with minimal paperwork and no new underwriting. You choose one of the rates your lender is offering, usually with no forms to complete, and you move onto the new rate when your current deal expires.
However, opting for a product transfer may mean you don’t get the best rate; to do this, you may need to remortgage to another lender. This involves a new mortgage application; a new valuation of your property and you need to meet affordability criteria. There will be costs involved for example legal, valuation and arrangement fees – and it will typically take longer.
Wendy says: “The main thing to consider is bank versus market. Your bank/lender may be offering a good rate, which you can get with the click of a button, making life nice and easy. But you should always consider what else is available in the market or it might cost you more in the long run.”
This is where the importance of advice is evident as it might not be the right move to slip onto another two or five-year fix with your existing lender. Elena explains: “I am often challenging clients, asking questions such as ‘are you planning to move?’ If ‘yes’, then you need to be careful as it is not always straightforward to port a mortgage to a new property and if you can’t, you could be liable for significant Early Repayments Charges (a charge levied by the mortgage lender on the customer in the event that the amount of the loan is repaid in full or in part before a date or event specified in the contract). Opting for another five-year fix in these circumstances may not be a sensible move; a two-year fix might work better.”
When should you be having these conversations?
Under the Mortgage Charter, a voluntary code launched in June 2023, lenders agreed to let borrowers book their next fixed rate six months before their existing deal expired. However, since last summer, lenders have been reducing their product transfer windows to three or four months.
Elena recommends starting your search well in advance, so you are prepared and know what’s available. “I typically have a conversation with a client five to six months before their current deal ends to understand if any circumstances have changed,” she says. “Then prior to the deal expiring, we find out what their lender is offering and compare this to the market as a whole.”
Wendy adds that borrowers shouldn’t be rushed into taking a product transfer as there is time to explore the options. “When rates are rising, you want to secure your new deal quickly before the rate disappears and is replaced with a higher one. But we are on a downwards trend so there is more time to review rates.”
With rates coming down, is there a risk of locking in too early?
“It is always better to secure the rate and peace of mind,” says Elena. “There is more work for the broker, as we could review your rate up to 2-3 weeks before the current rate expires to make sure it is still the best option.” This is yet another reason for using a broker; if you opt for a product transfer the lender won’t inform you if a cheaper rate becomes available before you move onto the new deal, whereas the client and broker can agree a review plan or keep in touch regularly.
Remortgaging offers more flexibility
The payment shock facing borrowers is something brokers can assist with. Options may include restructuring the loan, extending the term, or moving partly onto interest only, which usually you cannot do with a product transfer. Wendy says: “If your circumstances have changed, we can review terms, restructure the mortgage, and make things easier. Some borrowers’ mortgage rates are increasing from circa 1.5 to 4 per cent – that’s a huge jump.”
Elena points out that landlords have typically opted for product transfers when rates and stress tests (the process lenders use to assess a borrower’s ability to manage mortgage payments if interest rates rise) have increased so they haven’t been able to refinance. Now, she says, a lot of lenders are more sympathetic “particularly if you opt for a five-year fix. Buy-to-let rates have fallen so we encourage clients to look at what else is out there rather than automatically going for the product transfer”.
Are there different considerations for high-net-worth mortgages?
High-net worth clients who have a mortgage with one of the private banks may find they are better off remortgaging to a high-street lender than taking a product transfer. Wendy says: “We might have chosen a private bank initially because of the client’s circumstances, but things change. It could be time to return to the high street and save thousands of pounds – it’s worth reviewing.”
Don’t miss a trick
Both Wendy and Elena feel that clients who go down the product transfer route are taking a risk in not seeking advice. Wendy says: “It’s frustrating when I have arranged a difficult case in the first place, then they tell me they clicked on the button to take the product transfer direct from the bank. Easy perhaps but there are other things to consider.”
Elena adds: “The main risk of a product transfer is that there is no advice. Would it be better to fix for five years at 3.79 per cent than for two years at 3.29 per cent if there is a risk that base rate might go up again in two years? Wouldn’t that five-year fix provide better peace of mind? We just question the options; the trouble is we make it look so easy that clients sometimes think they can do it themselves next time. What they should try to remember is that the broker works for the client whereas the bank does not.”
If you are coming to the end of your initial mortgage rate and want to discuss your options with our expert team, then contact us now.
