As we take on a mortgage for between twenty and thirty years, it can be easy to think that interest rates will not make that much difference as the term is so long. If the difference between two lenders is very small with regards to the rates, then it is easy to think that it is not worth worrying too much as it will make very little difference. However, it is important to understand about the way that charges and rates work for mortgages and therefore whether changing to a lower rate will help.
How mortgage charges work
Mortgage lenders charge in a selection of ways but interest rate is the main one. You may be charged fees for setting up a mortgage, for overpaying, for switching lenders, for repaying early and all will charge for missing repayments. However, the interest rate is the one that we tend to compare them on. This is because these one-off charges tend to be small in comparison to the interest which has to be paid until the loan is fully repaid. The interest is charged on the money owed and so the more you owe, the more interest you will pay in monetary terms. So if you have a repayment mortgage, then you will repay some of what you owe each month and this means that the amount that you pay in interest would fall each month if the rate of interest stayed the same. With an interest only mortgage, you do not have to repay any of the balance until the mortgage term is up which means that your interest payments would stay the same. This means that assuming both of these were charged at the same rate of interest, the interest only would be a lot more expensive. However, you should be making monthly investments to build up a lump sum to repay your mortgage at the end of the term. This money should be making a better return than you are paying in interest which means that you should be better off by the end of the mortgage term. This means that the rate of interest can be much more significant for those with interest only mortgages but also for those who owe more money as they are being charged interest on more.
Can savings be made by swapping?
Switching mortgages can feel like a big effort for very little. You will have to research different companies and find out what their rates are. As well as comparing rates though, you also need to take into account charges. You may be charged for leaving your current lender, for example and you may be charged for joining a new one. It is really important to find out what these charges are and calculate whether you will still make savings by switching despite having to pay them.
Significant savings can be made by swapping in some cases though. Even a small difference in interest rates can make a significant difference, especially if you owe a lot of money still. It can be worth calculating to find out. Find out form your current lender what your interest charges are and then ask the lenders you are considering what they will be. You will then be able to compare. If you are saving £20 a month it might not seem like much but if you add that up over what is left of your mortgage term it could be significant. If it is over ten years then you will save £2400, for example, which is not a n insignificant sum of money and all you need to do is to fill in a few forms. If you check every five years or so and switch to the cheaper lender then you could end up saving even more money. How much you can save will all depend on how competitive your lender is.
Is it worth the effort?
It is really up to you to decide. For some households even a very small saving will make a big difference to them but for others they will want to see a significant saving to make it worthwhile. However, it is worth noting that if you regularly switch to other providers as well such as insurance and utilities, then you can save money in lots of areas and make significant gains by adding up those savings. You may also think that you just do not want to pay more than you have to for anything as then you will have extra money to treat yourself, save up or spend on other things. It will not take that much time to look at what other lenders are offering and even to switch over to them. It could be just a little work for a huge saving and so it is well worth considering.