Remortgage vs Product Switch: What Lenders Aren’t Telling You
Last Updated: 28-09-2023
Reading Time: 12 minutes
Today more than ever, lenders are encouraging their existing customers to ‘product switch’ their mortgage. If you’re coming to the end of your initial rate period or have dropped onto your lender's SVR, you’ll likely jump at the chance. After all, what they’re offering is good, old-fashioned customer service, right?
Not always. If you’ve never used an experienced broker before, you’ll go on believing you’re getting the best deal from your current lender.
In some cases, you may well be: a product transfer is the right option for you. But, I want to show you why remortgaging is a viable option, by:
- Helping you realise why dealing with one lender is ‘inadvisable’;
- Showing you which key offers to avoid (e.g. ‘execution only’);
- Availing you of the ocean of choice by using an experienced broker;
- Conversely, explaining product transfer ringfencing, and when is the right time to consider it.
My current fixed rate is about to end; will I pay more?
Let’s get the elephant in the room out of the way. If you took out your fixed-rate deal between two and five years ago, you’re going to pay more for your mortgage today.
The Bank of England’s base rate is 5.25%, and the market predicts that’s around where it will stay for the next two- to three years. If you’ve held back on remortgaging thinking there’s going to be a significant rate cut, don’t kid yourself. Not. Gonna. Happen.
Now that that’s out of the way…
What ringfencing is
I know not everyone reading this article will be ready to take the plunge right now. But, did you know that you can ringfence your next mortgage deal for up to six months before taking it out?
Not many people do. But with our help, lining up your next fixed rate mortgage way in advance is a doddle.
We constantly monitor the best mortgage rates.
We’re 100% independent, so can approach any lender on your behalf.
What’s more, our team is in constant contact with its network of underwriters across the UK mortgage landscape.
This puts us in a unique position: we can give our clients the opportunity to tie in a fixed-rate deal up to six months before theirs is due to expire.
In a time when the world is so volatile, and the Governor of the Bank of England has categorically not ruled out further base rate rises, having that option is invaluable.
What if rates go down after I've ringfenced a deal?
You are not committed to any rate we ringfence for you until you give us the all-clear to proceed. So, should lenders bring their rates down in the interim, we can often drop that ringfenced rate to get you a better deal.
Some lenders allow you to swap ringfenced rates as often as you like. Others set a limit on the number of times you can swap. When you talk to one of our advisors about specific lenders, they'll let you know how flexible they are.
Remember, we're constantly monitoring rates, so there's no chance of FOMO. Here are more reasons you should consider tying in a deal as soon as.
When ringfencing a product transfer might be an option
Protecting yourself from rising interest rates is an obvious reason you’d ringfence your next deal.
If you’re on a fixed-rate mortgage, you may be concerned about interest rates rising when your initial rate period ends. Ringfencing a product transfer would allow you to secure a new fixed-rate deal without having to wait until your current period expires.
This allows you to safely budget, and make other key financial decisions, beyond your current deal. Plus, if interest rates rise in the interim, you’re on a winner both ways.
Protecting what you have
Ringfencing a product transfer also allows borrowers to switch to a new mortgage deal with their current lender. In this Cost of Living crisis, that could be essential.
September data has revealed more people than ever before struggling with their mortgage payments. If you’ve struggled yourself, it might make you ineligible to remortgage with another lender.
In this case, a product transfer might not mean simply a lower interest rate. It could be a good option if your existing lender is offering better terms, such as extended fixed-rate periods or even the full term of the mortgage.
Spreading the cost of your mortgage over a longer term will reduce your monthly repayments, but will cost you more in the long run.
I’m on my lender’s SVR; surely a product switch is advisable
With how much interest rates have risen since coming out of the pandemic, I get why a product switch is tempting. Lenders’ standard variable rates are astronomical. If they offer you a new mortgage deal lower than their SVR, you’re going to think you’re onto a good thing.
But here’s the thing about blindly accepting the first rate your lender offers. You’re cutting yourself off from the rest of the mortgage market. And, for contractors and umbrella employees, choice is paramount to getting a mortgage rate that truly reflects their status.
Anything for an easy life?
But I do get it. I can see why a contractor, who may have struggled to get a mortgage under their own steam before, would go for the easy option.
They see the ‘execution only’ deal on their lender’s website. No financial checks, no fees, and no paperwork to compile. Just pick up the phone, and talk to a call centre agent. They send you the paperwork, and all you have to do is sign a handful of times, et voila. You’re done.
But, opting for the easy life could cost you thousands on your mortgage repayments, over time. That's the real risk of going the 'execution only' route. You get no advice, and any liability for your new rate is on you!
I also know contractors. They’ve worked hard to get where they are. They’ve seen cut after cut on what they can claim against tax. And, frankly, they’ve had enough. If there’s a saving to be made, they’re up for it. That’s where we come in.
The flaws inherent in desktop evaluations
The biggest beef I have with product switches is that the lender assumes the value of your home based on your existing mortgage. This is when having a broker who knows how to communicate with underwriters is invaluable!
For a start, we ask: when did you take out your current mortgage?
Even if it’s just two years ago, your home has probably risen in value (depending on where you live, the type of home, etc.). If it was five years ago, you’d have to be unlucky not to have seen a decent increment in the value of your home.
And then there’s: what have you done to your home since you last took out a mortgage?
Let’s be blunt: contractors and umbrella employees earn good money. Many will have spent not an inconsiderable amount ‘doing up their gaff’. A new kitchen, conservatory, garage, garden, loft conversion – there’s no end of improvements you could have made. These all add value.
Putting that value-add to proper use
Most of you know that the more equity you have in your home, the lower the interest rate you’ll pay. The difference between 90% Loan to Value (LTV) and 80% LTV is substantial.
By asking the questions we do about your home, we establish whether you aren’t missing out on savings.
The amount you borrowed for your current mortgage will be the same, minus the payments you’ve made. But if your home has increased in value, there’s every chance the new equity in your home gives you more bargaining power. Most desktop valuations won’t do that!
Once we’ve gone through our valuation Q&A, it gives us visibility into how close you are to that next LTV tier. Now, if you’re a contractor, you’ve probably got retained profits in your limited company. Or, as an umbrella employee, you may well have savings.
If you’re within, say, a couple of grand of that next LTV tier, we put the question to you. Is it worth using those profits/savings to pay off a lump sum and get you to that next tier?
In many cases, the answer is unequivocally yes. And, often, that investment’s recouped within the new fixed-rate period.
We’d need to be precise about the figures, which are unique to each borrower. But why not see if we can get you there?
When is the right time to fix my mortgage rate?
If you’re on your lender’s SVR, act immediately. You’re throwing money down the drain. Average fixed-rate deals are much lower than standard variable rates.
And, contrary to some people’s belief, just because you’re paying more interest doesn’t mean you’re bringing your mortgage down quicker.
Or, maybe you need to set a mid- to long-term budget, even though you’re within six months of your current deal ending. Tying down an interest rate now will help you plan for the future.
Conversely, if you only took out a five-year fixed deal last year at around 2%, do nothing. Enjoy the low repayments while you’ve got them. You have time to plan and budget for increased payments between now and when your deal expires several years from now.
You really product switch for FREE!?!?!?
Another bonus for you: we don’t charge for product transfers. Your lender might be offering several product transfers and you might not know which is best for you.
Our expert advisors will ensure your best interests are at the heart of any decision you make. Whether it’s a product transfer or a remortgage, talk to us in confidence. We can put you on the right path.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.
Posted by John Yerou
on September 27th, 2023 13:18pm in