There are no fixed rules when it comes to how often you can change your mortgage deal. It will depend on several factors such as age, your financial and credit history, and what offers are available. Older homeowners seeking new mortgage deals may face additional challenges. However, there are alternatives, such as lifetime mortgages and home reversion schemes.
How often should I change my mortgage?
Nothing is set in stone when it comes to how often you should change your mortgage. Some will switch to a better rate, while others will look for alternatives before they revert to a standard variable rate. However, there are several issues to take into consideration.
Homeowners looking for new mortgage arrangement may need to pay many different fees. There may be exit fees, arrangement fees, legal fees and valuation fees. These are all expenses you need to take into consideration when calculating the potential benefits of switching.
Introductory mortgage rate
There are many reasons why you may change your mortgage, but an attractive introductory mortgage rate is the most common. It is essential to look at the mortgage rate in conjunction with fees, and also the term of the introductory offer.
Equity in property
The amount of equity you have in your home will be a significant consideration when looking to change your mortgage. If you have little or no equity in your property, you will struggle to find an alternative. If you have relatively high equity content, this will put you in a strong position to negotiate an attractive rate.
Since the worldwide economic crash of 2008/09, the UK authorities have introduced stringent mortgage affordability tests. So, if your income has fallen in recent years, you may struggle to pass the test.
Will switching mortgages affect my credit rating?
In the short-term, you may see a dip in your credit rating if you switch mortgages. In the medium to longer-term, you should see a recovery if you maintain regular repayments. One of the concepts behind the credit rating system is consistency. If you are continually switching personal loans, mortgages, and other financial arrangements, this will have a detrimental impact on your credit rating.
Each time you make a formal mortgage application, the lender will carry out what is known as a “hard credit check”. This process allows the lender to see all of the financial information held on your credit account. If you were to make a tentative mortgage application, your lender would likely carry out a “soft credit check”. When it comes to your credit rating, a hard credit check could potentially have a detrimental impact. Soft credit checks are noted on your file, but not available to any third parties, so any effect would be negligible.
Should I fix my mortgage for 2 or 5 years?
When looking to fix your mortgage rate, you will likely come across fixed-rate deals of between two years and five years. On occasion, you may be able to negotiate a longer fixed-rate, but this area of the market is not as competitive. So, the question is, should you fix your mortgage rate for two or five years?
Why should you consider a two-year fixed-rate mortgage?
There are numerous factors to take into consideration when looking at a two-year fixed-rate mortgage. These include:
- Personal finances
If you expect your finances to improve in the short-term, you may well be able to negotiate an improved rate after the two years. For example, you might be expecting to receive a lump sum which you could use to reduce your mortgage capital. As a consequence, on a lower Loan to Value (LTV) ratio, you may be able to negotiate a better deal. The LTV ratio is mortgage debt reflected as a percentage of the value of your home. Hence, the lower the LTV, the greater the asset cover, and the lower the risk to the lender.
- Outlook for interest rates
This subject is not as straightforward as it may seem. The only interest rate you can be sure of is the rate you have before you today. Experts may be predicting further declines in UK interest rates, but there are no certainties. We might also get to a point where mortgage rates won’t follow falls in base rates, for example, if they were to turn negative.
Why should you consider a five-year fixed-rate mortgage?
The UK mortgage market is extremely competitive, and from time to time, lenders may offer outstanding mortgage deals. Consequently, there may be many reasons why you would consider a five-year fixed-rate mortgage:
If you can lock in a five-year mortgage on a fixed-rate, you know your outgoings for the next five years. Even if this rate is slightly higher than the two-year fixed-rate, to many people, stability is a crucial factor. If you had surplus funds available in the future, you could make additional repayments against the mortgage capital.
- Interest rates
As we touched on above, numerous experts will have different opinions on the direction of UK base rates, which do influence mortgage rates. When looking at the five-year rate, it is also worth considering the standard variable rate. If there is a significant difference, it may well be worth considering an extended fixed-rate term.
Is my mortgage worth changing?
While there are many scenarios in which you might look to change your mortgage, there are two main reasons. They are:
- Financial benefit
There are numerous potential financial benefits when switching mortgages. We have the basic differential between your current mortgage rate and the mortgage rate on offer. There is also the potential to reduce your mortgage payments, by remortgaging on a lower LTV. The lower your LTV, the lower the risk to the mortgage provider, hence you should attract a better rate.
- Fixed-term coming to an end
The majority of fixed-rate mortgage terms are between two years and five years. It makes sense to review your mortgage as you approach the end of your fixed-term, facing a potential switch to a higher standard variable rate. You may find that your current mortgage provider is offering other attractive mortgage deals, and you may be able to switch. Alternatively, there may be more attractive rates on offer from other mortgage providers.
Can I change my mortgage after two years?
In theory, nothing is stopping you from changing your mortgage after two years. However, you may face potential credit rating issues if you switch mortgages regularly. Each new mortgage application has the potential to reduce your credit rating. However, if you keep up-to-date with your repayments, this should recover. It is sensible to take advice about the pros and cons of continually switching your mortgage.
Alternative mortgage deals
As we touched on above, there may be some situations where you are unable to remortgage because of a change in your income. This would likely impact your ability to pass the mortgage affordability test. However, for those aged 50 and over, there are two alternatives which are:
Home reversion schemes
It is imperative you take advice if considering a home reversion scheme. In effect, you will be selling part of your home, to a third-party investor, at a discount to the market price. There are pros and cons, such as you would live rent-free until you moved into full-time care or died. However, there may be restrictions if you were looking to move home in the future. As and when your property is sold, the third-party investor would receive their appropriate share of proceeds.
As with home reversion schemes, there is no mortgage affordability test with a lifetime mortgage. You are merely remortgaging part of your property, with the LTV unlikely to be above 50%, but there aren’t any monthly repayments. Interest payments are rolled up and repaid at the same time as the capital. The property will be sold upon your death or moving into full-time care. At this point, the lifetime mortgage (plus rolled-up interest) is repaid, and the balance returned to the homeowner/estate trustees.
It makes sense to keep abreast of changes in the mortgage market. You will, from time to time, spot attractive headline interest rates. However, they need to be considered together with other issues such as fees. Continually switching between mortgages is often frowned upon by credit rating agencies. But so long as you maintain your repayments, there should be no lasting damage. If you are looking at a new mortgage, it is crucial to take financial advice. This ensures that an overall package can be shaped around your particular needs.