“IF I MOVE I’LL TAKE MY MORTGAGE WITH ME” – A DANGEROUS ASSUMPTION BY DANIEL MCLARDY
Many mortgage contracts allow the homeowner to transfer their mortgage across to a new property should they decide to move. In the mortgage industry we call this “mortgage porting”, and in some instances it can prove to be a very useful mortgage feature. However, the ability to port your mortgage is not a given, and here I want to provide insight in to why it would be dangerous to simply assume you will be able to port your mortgage in the future. I will also explain why successful porting doesn't always result in an optimal outcome.
WHY DO PEOPLE FIND MORTGAGE PORTABILITY APPEALING?
(1) TO AVOID ERC’S (EARLY REPAYMENT CHARGES)
Mortgages commonly have ERC’s during the initial rate period, with fixed rates possessing ERC’s the greater majority of the time. These charges usually represent significant sums if the mortgage is ended within the initial scheme period, and porting usually allows this charge to be avoided.
(2) TO RETAIN AN ATTRACTIVE INTEREST RATE
Porting a mortgage could allow the holder to retain an attractive interest rate that may not be available at the point they move.
WHAT WORRIES ME?
Sometimes I meet clients with the idea to take an introductory mortgage rate that extends beyond their plans to move, with this happening predominantly for fixed rates. For example, a client expresses a preference for a 5 year fixed rate, even though they’re likely to move within this period, and the reasoning is often along these lines:
“I’d prefer a 5 year fixed rate instead of a 2 year fix because I think interest rates could go up. Even though I'll probably move in around 2 years, I’ll simply port the mortgage to the new property."
Cue the alarm bells. Assuming that you will be able to port your mortgage and avoid hefty ERC’s carries significant risks, and I’ll explain these below:
(1) CRITERIA RISK
Lenders change their criteria on a surprisingly regular basis – what your lender accepted yesterday may not be the same today. As an example, I had a call last year from a lady that was something like this:
“Please help! I have 3 years left on my fixed rate but my lender is currently restricting lending to self-employed applicants, and I can’t port. 2 years ago this wasn’t a problem, and I’ve found the home of my dreams. There’s no way I can afford to pay the ERC on my £200,000 mortgage balance. It’s 3%, £6,000”.
While I could find a less strict lender who would accept their self-employed income, the £6,000 was too prohibitive for her to make the move. Devastating.
(2) CIRCUMSTANTIAL RISK
A lender’s criteria may not change, but your circumstances might, and again this poses the risk you won’t be able to successfully apply to port your mortgage. A phone call I received recently:
“My wife and I have been looking to move since the birth of our son 6 months ago. We’ve found the perfect property with a great garden, but my lender won’t let us port because I changed employment in the last 6 months and took a 2 month break in between. My lender only allows a maximum of 1 month break between employments within the past 6 months, so looks like we’ll have no choice but to pay the £3,400 ERC. Is this really true – I didn’t know it was a thing for a lender to care about something like this??”
It was true, the lender did have this policy, yet there are numerous lenders who don’t. The gentleman and his wife paid the ERC to move to a different lender because they desperately needed a larger home, which was highly unpleasant amid the new commitments associated to having a child.
(3) PROPERTY RISK
A form of criteria risk, property risk is associated to situations where a lender refuses to accept the new property for mortgage purposes. We’ve seen this, for example, with new build properties where the lender has reached their “exposure limits” (the number of properties they are willing to lend on within a single development). There are numerous other nuances, too, such as properties located close to commercial premises (particularly relevant to flats) and properties built using MMC (modern methods of construction). Property risk is another pitfall often overlooked.
(4) PRISONER RISK – SUCCESSFUL PORTING CAN RESULT IN UNMATCHED LOAN PARTS
Often overlooked are the implications of successfully porting your mortgage, but needing to borrow more for your new purchase. Additional borrowing is usually on a separate mortgage product selected from the lender’s current offerings, resulting in a mortgage of two parts, each with an introductory rate expiring at different points in the future. This has the potential to trap borrowers in to remaining with their current lender, as it is uneconomical to allow either loan part to transfer to the lender’s high SVR (Standard Variable Rate). This issue is particularly pronounced where both loan parts are of similar size..
(5) LOAN REDUCTION RISK - IF YOU NEED TO BORROW LESS, AN ERC MAY STILL APPLY WHEN PORTING
Another often overlooked possibility are the consequences of needing to borrow less when porting your mortgage. This often (depending on the mortgage contract) results in an ERC being payable on any amount you don't port to the new property, so this can have implications for those looking to downsize, or those simply looking to reduce their mortgage burden.
TO CONCLUDE
Mortgage porting risk is very real, and making the assumption you can port your mortgage without barriers could result in a high cost in the future. This cost could be financial, in the form of an ERC, or the cost of missed opportunities should it scupper your plans to move. The potential emotional costs should also not be underestimated - planning a home move is stressful enough without the added strain of mortgage porting issues.
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