What happens when you are on a good mortgage deal, with several years left to run but you need to refinance in order to step up the property ladder and secure your dream property?
With interest rates rises predicted and lenders starting to increase their own rates this could be a realistic dilemma for many homeowners.
And, indeed, this was the conundrum faced by Zoe Farr (pictured), a software developer from Leeds, when she and her family decided to move to a larger property.
Zoe and husband Matt had taken out a competitive ten-year Bank of England base rate tracker with Yorkshire Building Society back in 2008.
Thanks to the base rate remaining at 0.25% for most of the term, they had been benefiting from low monthly mortgage repayments for years. It was no surprise then that they were keen to hang on to this deal for as long as interest rates remained at this level.
“I went to my local branch to speak to a mortgage advisor about our monthly repayments, initially,” said Zoe.
“Having a conversation with the advisor it became apparent that it was a bit of a no-brainer to take our current deal with us given that we were onto such a good long-term deal.”
Zoe managed this thanks to a process called porting. This is where borrowers transfer their existing mortgage deal from their old to their new home. If they need to borrow more overall, they can add to the loan with the new mortgage.
According to her lender, Yorkshire Building Society, at a time when interest rates are low, but rises are on the horizon, many home movers may be missing a trick by not ‘porting’.
Only 6% of its customers who moved house applied to port in 2017. In a survey the lender discovered the reason behind many people not taking this route was because they thought they would get a better interest rate if they took out a completely new mortgage.
Yet, taking into account the exit fees and early repayment charges (ERC), porting may even work out as a money-saving option for some.
Chris Irwin, senior mortgage manager at Yorkshire Building Society, said: “Getting a lower rate than your existing mortgage may not always mean you are getting the better deal overall.
“We are seeing a growing trend in borrowers locking into longer term deals, perhaps due to recent political and economic uncertainty plus a potential upward trend in interest rates.
“However, life never remains static, so porting could be a good option for people looking to move either up or down the property ladder and retain their current mortgage deal.”
Porting, of course, is not for everyone and there are a few pitfalls to look out for if you are considering this option.
According to Peter Gettins, Product Manager at London & Country Mortgages, it was most useful when borrowers were tied into deals which could incur hefty ERCs if they had to find a new lender.
However, he warned that it wasn’t always the answer and there were limitations because there is no guarantee the lender will be able to meet those new requirements.
He explained: “The new purchase will need to meet prevailing lending policy at the time, not when the loan was originally taken out. So there are a couple of areas where that could throw up some issues.”
Another point to consider is that the new property would need to provide suitable security. So, if concerns are raised during the valuation the lender may not be willing to transfer.
What’s more, affordability tests might also have become tighter since the original mortgage was taken out, said Gettins. This could happen if higher interest rates lead to stiffer stress testing. Even if you borrowed a higher amount at day one, you aren’t always guaranteed to do so later.
“Changes in circumstances can also have an impact,” Gettins pointed out. “[This could happen] if the borrower had recently become self-employed and couldn’t provide sufficient accounts, or they may have started a family and incur childcare costs that limit borrowing.”
He also warned that if you decide porting is for you, to ensure conveyancers aware of any ERCs to limit the risk of surprises, albeit short term.
Problems can arise if there is sale and a purchase, but the latter gets held up. In this case the ERC will need to be paid, usually to the tune of several thousand pounds, and then the lender will refund it when the new purchase goes through. But the solicitors will need to be aware of the situation.
When it works however, it can be hugely beneficial. And for Zoe and her family it has been the ideal solution.
She said: “Our new home is much bigger and has more land which means there’s potential for extending our home – I’m really looking forward to building a garage and utility room.”
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