Half of mortgage borrowers stick with their lender, but it could mean paying more interest

12 Oct 2023

Half of mortgage borrowers stick with their lender, but it could mean paying more interest

A woman talking on the phone at home.

When your current mortgage deal comes to an end, your lender will usually offer you a new interest rate to encourage you to remain with them. This is often called a “product transfer”. 

While choosing this option does have some advantages, you could be missing out on a more competitive deal that may save you money. Read on to discover the pros and cons of a product transfer. 

Mortgage deals will typically last for two, three, or five years. Once the deal ends, you’ll normally have three options:

  1. Stay with your current lender using a product transfer: If you’re up to date with your monthly repayments and aren’t looking to borrow more against your home, your lender may offer you a new mortgage deal, which is known as a “product transfer”. 
  2. Remortgage your home: You can take out a new mortgage on your home, either with your existing lender or a new one. You’ll need to go through the mortgage application process.
  3. Do nothing: You don’t have to use a product transfer or remortgage. If you do nothing, you can continue to make mortgage repayments. However, your lender will usually move you on to their standard variable rate (SVR), which is often higher than comparable deals. 

According to This Is Money, soaring interest rates and uncertainty around affordability have led to product transfers gaining popularity. 

During the first half of 2023, data suggests half of mortgage borrowers used a product transfer when their deal ends. In comparison, just a quarter remained with their current lender in the first half of 2022.

3 practical reasons homeowners are choosing a product transfer

A product transfer usually involves fewer checks

When you take out a new mortgage, the lender will assess how likely you are to maintain your mortgage repayments by carrying out affordability tests. Often, they will consider how you’d cope financially if interest rates increased.

As interest rates are already higher than they were two years ago, some homeowners may be worried they’ll no longer pass affordability tests even if they’ve kept up with repayments. 

A product transfer usually involves fewer checks. So, if you’re worried about meeting lenders’ criteria, a product transfer could be a useful option. 

2. There will typically be less paperwork if you choose a product transfer

If you take out a new mortgage deal, you’ll need to go through the application process. This will include filling out paperwork and providing evidence that you can meet the repayments.

In contrast, a product transfer will typically be a quicker process as your lender will already have the key information, along with your repayment history. 

3. A product transfer could help you avoid fees

Taking out a new mortgage could mean you face additional charges, such as an arrangement fee. By opting for a product transfer, you could avoid these costs – although there may still be fees associated with a deal you take out through your existing lender. 

A product transfer could mean you pay a higher rate of interest

While a product transfer may be an attractive option, it’s a decision that could mean you pay more in interest. Over a full mortgage term, a higher interest rate could add up to thousands of pounds, so shopping around might be valuable. 

 There are two key reasons why switching your mortgage to a new lender may reduce your outgoings. 

1. A different lender may offer a lower interest rate than your current provider 

Interest rates have increased over the last two years. Yet, they are starting to fall and there is a substantial difference in the rates offered by different lenders. 

You may find that the rate you’re offered through a product transfer isn’t as competitive as the rate you’d receive if you switched to a new lender. 

2. A product transfer may not include a re-valuation of your home

The value of your home may have a direct effect on the interest rate you can access.

Lenders will calculate your loan-to-value (LTV) ratio when assessing your mortgage application. The LTV measures how much money you’re borrowing compared to the value of your home.

If your home was worth £300,000 and you were borrowing £200,000 through a mortgage, your LTV would be 66%.

Typically, the lower your LTV the more competitive the interest rate a lender will offer you as you pose less of a risk. 

If you have a repayment mortgage, your LTV will gradually fall as you make repayments. The value of your home rising would also reduce your LTV. 

When choosing a product transfer, your existing lender may not re-value your home. So, your lender could place you in a higher LTV bracket than you would be in if you decided to remortgage with a different provider. This may mean you don’t benefit from lower interest rates available elsewhere.

Is your current mortgage deal ending? Contact us to discuss your options

If your current mortgage deal expires soon, the decision you make could affect your budget and long-term finances. We can help you understand your options and provide expert guidance, whether you decide to stay with your current lender or take out a new mortgage deal with another provider.

Please contact us to speak to one of our team. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. [12/10/23]

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