Mortgage product transfers: are they ever a good deal?

Mortgage lenders are encouraging borrowers to remortgage early by waiving penalty fees.

Have you received a letter from your mortgage lender offering you the chance to remortgage up to six months early with no penalty charges?

Think twice before you take up the offer.

Recently, Santander has been sending out letters to mortgage customers encouraging them to sign up for a new deal in order to cut their repayments.

But the move is far from altruistic.

Search for a cheaper mortgage deal today: see if you could save

What’s in it for the banks?

If you move to a new mortgage with your current lender without borrowing any more money or changing any of the details of your contract it is known as a ‘product transfer’.

Unlike a formal mortgage application these do not have to be reported to the Bank of England or the Financial Conduct Authority (FCA), and that’s good news for the lender.

As ‘product transfers’ don’t count as new lending banks and building societies don’t have to require that you take financial advice before taking out the mortgage.

Instead it can be done ‘execution-only’ which saves them time and money.

The Association of Mortgage Intermediaries (AMI) believes that mortgage lenders are conducting between £80 billion and £100 billion of mortgage lending through product transfers to avoid reporting to the FCA.

“While some lenders have chosen to put borrowers through the advice process at remortgage, others have not,” Robert Sinclair, chief executive of the AMI told property news site Mortgage Introducer.

“The clear intention of the Mortgage Market Review is to have an advised market.

“We want clarity on whether that’s been achieved or not.”

Now, it’s probably fair to say that mortgage intermediaries have their own agenda when it comes to product transfers: as they occur directly between the lender and the borrower, the middle man is completely excluded.

That said, there are good reasons to be weary of simply diving into such a deal.

What are the risks for borrowers?

While it may seem simpler to opt for a product transfer, you could end up spending thousands of pounds needlessly.

That’s because by moving to another mortgage with the same lender you are missing out on comparing your deal with what’s on offer across the market.

Also, a product transfer may not involve your house being revalued, which could adversely impact your mortgage rate.

If the value of your home has risen that will mean your loan to value (LTV) has shrunk.

Given that lenders offer better interest rates to people with lower LTVs that could mean you can get a much cheaper mortgage.

For example, if you took out a £150,000 mortgage on a £200,000 home your LTV would have been 75%.

If two years later your home is worth £250,000 and you’ve repaid £15,000 of your mortgage that means your LTV has shrunk to 54%.

Benefits of shopping around

Remortgaging may seem like more hassle than simply opting for a product transfer but it is hassle that could prove very worthwhile.

Even if you only managed to get a deal that was charging half a percentage point less interest it could save you thousands.

For example, if you had a £200,000 20-year mortgage and your lender offered you a new deal at 3% you would pay £48 a month more than if you remortgaged to a new deal at 2.5%, even with £500 of fees.

Over three years you would save £1,750 by choosing to remortgage.

Search for a cheaper mortgage deal today: see if you could save

What does the regulator say about switching?

For its part, the Financial Conduct Authority has said it is going to investigate ‘the approach lenders and brokers take to incentivising consumers to switch products’.

The bottom line is that it's up to you to do your research and ensure the deal you choose is best for your pocket – and not anyone else's.