Small & Short Term Mortgage

You are less likely to save money from swithcing lender if you have a relatively small mortgage. Relatively small usually lies somewhere between £1 and c£50,000 but the exact amount will depend on the interest rate you currently pay and any charges incurred in closing your current mortgage and setting up the new mortgage. For example if it costs £1,000 to move a £50,000 mortgage then you need to reduce your interest charges by 2% with the new lender to break even. This reduction might be over a number a years, for example... a 5 year fixed rate that is 0.5%pa cheaper with another lender saves 2.5% interest over 5 years, so you could save about £250. You need to ask yourself how much you need to save to make it worthwhile.

In the example above, the savings would be correct for an interest only mortgage. If your mortgage is a repayment mortgage then you would need to reduce your interest charges with the new lender by more than 2% to break even. The reason for this is that the mortgage balance would reduce after each payment and less interest would be paid, therefore a higher saving in interest is required to recover the £1,000 spent on charges to switch lender.

The rate at which a mortgage balance reduces after each payment is governed by the term remaining. Mortgage term, therefore, also has a bearing on how much you need to reduce the interest rate charged to recover the costs of moving a mortgage. Shorter mortgage terms make it less likely that you will save money if you have to pay fees to move your mortgage.

The correlation between interest rate, mortgage term and charges make it difficult to determine easily whether or not it is financially worth moving a mortgage. Thankfully, calculators make short work of determing a definitive answer for every scenario and of course we have developed one to do just that. Our true cost calculator will enable you to determine the potential savings; you need to know your current mortgage balance, the term remaining, fees to leave your current lender and details of the new mortgage (rate and fees charged). The calculator shows the cost of remaining with your current lender against the cost of the new mortgage. 

Sometimes the driving force behind switching lender is not to save money in the early years. For example, you might want to fix your mortgage payments because you believe interest rates will be higher in the future. You might be prepared to pay more now in order to save later.