Leaping the barriers to a new home loan

Emma Lunn shows how to work out whether lower interest payments will outweigh the costs of moving your mortgage deal
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The Independent Online

How much cash do you need to have dangled in front of you before you make the effort to change your mortgage deal? The answer, it seems, is £93.

This monthly saving on repayments, according to research from broker Bradford & Bingley (B&B), is the financial trigger required by the average homeowner before they can be bothered to switch.

Apparently, borrowers take a lot of persuading. Many are put off switching because they think the administrative process will be time-consuming, for example, or because they hold the mistaken belief that they can only remortgage if they move home. Fees also create barriers, the research found: nearly one in three borrowers think remortgaging is expensive.

However, there are still plenty of people seeking to save on their home loan, especially after August's base rate cut.

The value of remortgaging deals in Britain rose to £11.7bn in August, up by 15 per cent on July, to reach its highest level since October 2003, the Council of Mortgage Lenders reports.

How much, or whether, you can save depends on your circumstances. For example, if you're on your lender's standard variable rate (SVR) - and three in 10 borrowers are - you should switch to a short-term fixed-rate deal, says James Cotton of broker London & Country. "With most SVRs around 6.5 per cent, borrowers could reduce their rate by 2 per cent."

For example, under B&B's best deal, a homeowner with a £100,000 mortgage on a 6.5 per cent SVR could save some £150 a month (£1,800 a year) by remortgaging to a discounted, stepped tracker with an initial 3.99 per cent interest rate.

If you're already on a fixed or discounted variable rate, your switch options may well be more limited - with possible hefty fees for early redemption.

This is particularly the case if your deal has an "extended" redemption penalty. "While the initial rate [on these mortgages] is lower than on those without extended overhangs, you're stuck on your lender's SVR for so long after the end of the deal that it could easily wipe out savings made in the early years," says Melanie Bien of broker Savills Private Finance.

For example, Market Harborough building society has a 2.19 per cent two-year fix that reverts to its SVR of 6.54 per cent - but for three further years, there are extra charges if you leave.

The longer the term, the higher the penalties. Redeem a two-year fix with Britannia in the first year and its early redemption charge is 2 per cent of the total loan. Break out of its 10-year fix within 12 months, and this charge is 13 per cent.

There's another cost to leaving one lender for another: the "exit fee". In the past year, Alliance & Leicester has raised the administration charge for closing your mortgage account from £195 to £295, and Royal Bank of Scotland's fee has gone up from £75 to £225.

Once you've calculated the costs of leaving a deal, you need to weigh up those incurred for taking out a fresh one.

Fees for a new loan arrangement, valuation, survey and solicitor - possibly running into hundreds of pounds - can make that competitive interest rate look less attractive. "You need to measure savings against costs," says Simon Tyler of mortgage broker Chase de Vere.

Judith Hibberd, from Brighton, recently remortgaged away from Abbey after a move to its SVR at the end of a two-year fix left her paying an extra £200 a month.

"London & Country recommended a five-year fixed rate at 4.69 per cent with Nationwide, which saves me £89 a month."

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