Can you still saving money remortgaging?
By Corin Vestey     13th June 2007

Re-mortgaging used to be a sure-fire winner every time. But will you really be better off switching your home loan now that arrangement fees have increased so hugely?

The answer is of course – it depends. You can still save thousands of pounds by re-mortgaging to a better rate but you need to think more carefully about how you do it. You also need to shop around for the best re-mortgage 'package’. You should also see if your current lender will offer you a better deal as you won’t need a solicitor to be involved.

It is estimated that around half of all borrowers are stuck on a Standard Variable Rate (SVR) or other expensive mortgage rate. If you are one of these people read on to see two examples of how switching could work for you in practice.

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Mortgage example #1: The short-term switch
Mr. and Mrs. Smith’s fixed rate mortgage rate recently came to an end and they are now paying their lender’s full SVR of 7.5%. Bit of a nasty shock! The Smiths decide to re-mortgage to another fixed rate but they don’t want to fix for too long in case interest rates fall. They therefore decide to fix for two years at 5.05%. Here’s how it shakes out.

The new deal is to borrow £100,000 at 5.05% fixed for two years. But the arrangement fee on the new mortgage is £999, the lender’s valuation is £750 and the solicitor will cost them £500. That’s a total of £2,249 in fees. The Smiths don’t want to pay that so they add both the valuation and the arrangement fee (£1,749) to their loan amount and they pay the solicitor from savings.

The Smiths’ new mortgage is therefore a £101,749 loan at 5.05% fixed for two years. This will cost them £5,138 a year or £428 a month. Their old mortgage was a £100,000 loan at 7.5%, which was costing them £7,500 a year or £625 a month. The Smiths are therefore going to save £197 a month, or £2,362 a year or £4,723 over the two-year fix (£4,223 after the solicitor’s fee).

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Mortgage example #2: The long-term switch
Of course, after their two-year fix comes to an end the Smiths will again be paying their lender’s Standard Variable Rate (SVR) and so will have to re-mortgage a second time to avoid larger monthly payments. Let’s assume that rates then are the same as now and they choose a five-year fixed rate deal on another interest-only mortgage.

The Smiths are now borrowing £103,498 at 5.10% fixed for five years as the arrangement and valuation fees are the same as last time and will again be added to the loan. Mr. and Mrs. Smith will be paying £5,278 per year interest (£440 per month) with their re-mortgage as opposed to £7,631 per year (£636 per month) if they stay on their SVR. In total re-mortgaging will save them £196 per month, £2,353 a year or £11,764 over the five-year fix (£11,264 after solicitor’s fees).

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The lenders are getting more aggressive with their charges
You can see from the examples above that re-mortgaging can save you money, even over short periods of time and with today’s very large arrangement fees. What does this mean for the future? Possibly that arrangement fees will rise further, or that other 'admin’ charges will creep in to reduce the benefit.

For now though, for most people paying a Standard Variable Rate (SVR) re-mortgaging is still worthwhile. If you are not on an SVR and/or you face an early redemption penalty if you wish to get out of your current deal then your situation is more complex. Do your sums carefully – or take advice – before jumping in.

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Key re-mortgaging pointers
-Check for early redemption penalties
-Check with your current lender to see if they will cut you a deal
-Look for special free valuation and legal fees offers
-Use a no-fee mortgage broker to search the market on your behalf
-Do you want to raise capital or cut costs? Your needs will be different
-Think twice about extending your mortgage date beyond retirement
-Don’t over extend yourself taking out too much equity


Article produced by EveryInvestor.co.uk