Could remortgaging save you money?

Remortgaging is great in theory – you can switch to a new lender and save hundreds, if not thousands, of pounds a year.
But in reality, as with many areas of personal finance, it can be time-consuming and involve some off-putting up-front expenses. An estimated four million plus UK borrowers are currently paying their lenders’ higher standard variable rate instead of moving to a cheaper deal.

Remortgaging is often seen as a hassle, but it is getting easier,” admits David Mead, managing director of Kent-based advisers Flexible Morgage.net.

He claims savvy borrowers are becoming wise to remortgaging.

I would say that at least 70 per cent of our business is now remortgaging and we’re seeing a number of mortgage rate tarts. These are people who are prepared to put the effort in to remortgage and save themselves money.”

But remortgaging isn’t suitable for everyone, says Peter Gettins, product analyst at mortgage adviser London & Country: “If you’ve got a small loan, and only a few years left, the cost of remortgaging may outweigh anything you could save on interest.” He says the fees borrowers pay, for example legal, valuation and arrangement fees may simply be too much to justify the switch.

But it’s always worth speaking to an adviser to see if you can save any money. Then you can add up the costs for yourself.”

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Should you be switching?

Yes if…

• Your mortgage is a large one – the larger the loan, the more likely you are to save interest. The more you are borrowing, the more interest you are paying, so even a 0.3 per cent switch could save you hundreds,” says Gettins. For example, someone with a £100,000 mortgage could save up to £200 a month.
• You’ve had the same mortgage for 10 years. “The last decade has been great for mortgage deals and for product development. There are a lot more lifestyle products available that could be more suitable especially if you are an older borrower,” says Gettins. Plus it’s extremely likely your property has doubled in value. “If you are looking to release some kind of equity, remortgaging is one option,” he adds.

Maybe, if…

• Your circumstances have changed. Downshifting, changing job, becoming self-employed or starting a family could necessitate a mortgage switch. Gettins says: “It may be that you need to switch over to a more flexible loan such as an offset mortgage where you can overpay, take payment holidays or underpay.”

And maybe not…

• If you’ve recently remortgaged. “All remortgages will have an arrangement fee alongside legal and valuation costs, which could amount to far more than you bargained for. “We would not advise borrowers to switch too fre-quently as it ends up being really costly,” says Gettins.
• If you’re consolidating debts again. Mead says: “A lot of people remortgage after Christmas. That’s when their credit card bills start to kick in. But people need to remember that a credit card is an unsecured debt, and a mortgage is a secured one. If you default on a credit card the worst that can happen is that you get a county court judgment. If you default on a mortgage you can lose your home – that’s the difference.”

The cost of remortaging

Penalty charges

Unsuspecting switchers who are still in the initial period of, say, their two or three-year deal could also be liable for hefty penalty charges if they change mortgage lender. The charge can be up to 3 per cent of the loan.

If you are swapping to a cheaper deal with the same lender you may escape a penalty charge, but some deals even have penalties which run beyond the end of the initial deal tying you into a lender’s high standard variable rate.

Meads adds: “A reputable adviser will not sell a mortgage with an overhanging charge and we certainly never recommend products with extended penalty charges. It’s a new industry no-no.”

Arrangement fees

Also known as a booking fee, application fee or administration fee, these up-front charges are on the rise and range from £60 to thousands of pounds.

Some lenders will – as with penalty fees – charge a percentage of the loan instead; for example, a 1.5 per cent charge will cost someone borrowing £150,000 a fee of £2,225.

But fee-free remortgaging deals, with legal and valuation fees included in the deal, are increasingly common. Another option is to roll your fees into your loan to avoid paying them up front. However, you will pay interest on these fees, which is more expensive over time.

Exit fees

This is, says Meads, “a nasty little expense” that advisers and consumer groups are campaigning to abolish. Expect to pay the lender you are switching from anything up to £295 for releasing the deeds to your home.

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Timing the switch

Give yourself at least three months to set up your remortgage.

This means that the day your mortgage deal expires all the paperwork is in place, so you will never find yourself on the lender’s standard variable rate. With standard variable rates at around 6.5 per cent and best rates below 4.5 per cent, it makes sense.

But if the prospect of switching every two years fills you with horror, you can always go for one of the new lifetime rates.

Melanie Bien, associate director of Savills Private Finance, notes: “These are becoming more and more popular, with lenders like Abbey, Direct Line and The Woolwich offering them.”

The idea is that the rate is low enough that you won’t want to switch. “Of course your repayments will still be subject to change because they tend to track the Bank of England: if that goes up, so do payments, but most of the rates are pretty low to start with,” says Bien.

And if you don’t mind switching, two-year trackers are tempting for remortgagers at the moment. Gettins says Direct Line’s two-year tracker, at 4.19 per cent for two years with free valuation, is worth considering.

It’s only available online, so if you are brave enough to remortgage online then it’s a pretty good deal.”

Alliance & Leicester has also just reduced its two-year rates.

They are offering 0.16 below base rate at 4.34 per cent with a £499 fee. If you’ve got a smallish loan, it may be better to go for their 4.8 per cent rate, which is 0.39 over base, but the valuation is free, as are your legal costs,” says Gettins.

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