Fixed-rate mortgages with stings attached

Should you decide to swap your mortgage for a cheaper alternative, you may face a large penalty from your existing lender. By Tom Tickell

Picking a mortgage nowadays is like wandering round a financial supermarket, filled with special fixed rate offers, capped loans, discounted mortgages and tracker schemes. When they go, new loans with a super and improved financial flavour will replace them.

Picking a mortgage nowadays is like wandering round a financial supermarket, filled with special fixed rate offers, capped loans, discounted mortgages and tracker schemes. When they go, new loans with a super and improved financial flavour will replace them.

Lenders want to draw in existing borrowers, as well as new ones - and people are switching as never before. Moving from property to property and lender to lender has risen sharply. The average loan lasted for 10 years in 1997, whereas now it is already down to seven years, and falling.

Shifting to a new lender always brings bills. There may be fees on your way out. What is more, arrangement fees, solicitors' fees and the survey costs usually appear as you move the mortgage. So you have to do your sums.

Leaving costs vary enormously and may not appear at all. Groups such as NatWest and Cheltenham and Gloucester generally take a harder line than others. This month the C&G loftily claimed that its mortgages were Rolls-Royce products against basic 2CV loans elsewhere, so comparisons were impossible. Alas, no one else agrees.

Penalties will not apply on the basic variable rate loan, where interest moves up and down as lenders decide. But they may well appear with tracker loans which move automatically with interest rate changes generally. Anyone with a discounted rate deal, paying a guaranteed 2 to 3 per cent less than the basic mortgage, may face the same problem - and the same applies to capped loans where interest rates cannot move beyond a given level. Problems are more likely still with fixed rate mortgages lasting from two to five years where payments do not change.

If you switch while the loan is running, you typically lose six months interest, though generally the later you do it, the lower the penalty. That is standard, but one or two lenders like Northern Rock and West Bromwich penalise you if you move during the two or three years after that.

Many other lenders used to lock people in after the fixed term was over. So lock-in penalties can still apply if you took a fixed rate deal three or four years ago - even if new borrowers are clear. And lenders often have different contracts with different conditions terms running simultaneously.

Leaving costs are only half the story. Some joining costs are inevitable. Most lenders want a new survey to check your property's value. Bills will depend on the potential price, not the size of the mortgage. Survey will typically cost around £200 on a £100,000 house. Lawyers' conveyancing bills add another £250 or £300, though lenders like the Abbey National will sometimes pay both bills to bring in business.

Searches to check there are no building plans or complications add another £140 to £150 according to most specialists. Finally, the new lenders will levy an arrangement fee of about £300 to cover all their own administration and paperwork. The savings you make will depend partly on the immediate leaving and joining costs, but anyone on a standard £100,000 mortgage will find bills coming down sharply.

Assume you are paying a standard rate with the Halifax, says Sioban Hutton of mortgage brokers John Charcol. "We have a two-year fixed rate deal on offer with no moving penalties at all. If your Halifax basic mortgage is for £100,000, switching will save you £2,100 in the first year, far higher than all the switching charges combined."

Changing loans means calculations and a lot of paperwork, or a visit to a good mortgage broker. However, the crucial point is to check for stings in the small print before you commit yourself.