Source: https://www.mortgagesolutions.co.uk/better-business/2020/02/24/ercs-understanding-the-bigger-picture-vital-for-brokers-murphy/
In the UK there is an emerging trend of consumers being prompted to switch mortgages ‘in-deal’.

These prompts may come from a range of sources, and they can sometimes present positive options for borrowers who are coming to the end of their fixed term.

However, there is a significant group of borrowers who are being prompted to switch early on in their deal, and this is where problems may arise.

Switching in-deal has found great success in the US, where mortgage deals tend to have longer fixed-terms and, more importantly, no early repayment charges (ERC). These two differences between the UK and US housing markets may seem small, but their impact is considerable, especially when considering the suitability of mortgage auto-switching tools.

US versus UK

The average fixed term for a US mortgage is 23 years, whereas in the UK the average fix is 3.5 years. American borrowers also do not face early repayment fees for choosing to change deal during their fixed term. In the UK, the early repayment charges can be significant with varying conditions between lenders.

Due to these fluctuating terms, there is no one-size-fits-all approach when it comes to remortgaging in the UK, and to assume otherwise could lead to expensive consequences for consumers, from a rise in overall expenditure to foreclosure due to unaccounted-for fees.

At the end of the day, whether or not a switch will benefit the client comes down to a full understanding of ERCs and both their short and long-term impacts, so that both brokers and their clients are as informed as possible when the time to remortgage comes around.

For example, individual borrowers’ circumstances play a vital role when it comes to switching deals mid-term – advisers need to fully understand all aspects of each product, along with the factors facing their clients, if they are to offer useful advice for those considering a switch.

The bigger picture

The prevalence of switching offers is a direct consequence of the continuously falling interest rates we have seen over the last three years, which have led to a steady rise in demand for in-deal switchers.

Homeowners are keen to capitalise on offers which promise lower overall repayment rates, but once the fees of valuations and solicitors have been factored into the final savings amount, an initial saving of £5,000 might work out to less than £20 a month. This considerably reduces the incentive for the homeowner to switch.

Furthermore, even if the proposed new deal does provide a significant saving on monthly payments, it is unlikely that this would be better in the long run. The saving generated by running down the current deal to the end of the ERC period, and then choosing the cheapest available product, would often be greater.

More simply, even if the new deal is cheaper than the current deal, it is still unlikely to be as cheap as waiting and taking the best deal at the end of the ERC period.

An adviser’s primary function within the mortgage process is to provide complete and trustworthy advice to their clients.

Without a proper understanding of ERCs and the costs associated with switching mortgages while the borrower is tied in to a deal, advisers are unable to fulfil this duty.