Remortgages - stick or twist?

Switching lenders can save money, but there are drawbacks, says Stephen Pritchard
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Over the last few weeks, several banks and building societies have edged their mortgage rates upwards. The expectation is that the Bank of England will raise the base rate over the next few months, and interest rates, especially for longer-term fixed-rate mortgages, are reflecting that view.

If rates do rise, borrowers with tracker, discount and other variable rate mortgages will very quickly see their monthly payments rise. Two building societies - the Norwich & Peterborough and the Nottingham - have already put up their standard variable rates (SVRs).

Mortgage brokers Purely Mortgages estimates that as many as 40 per cent of borrowers who are paying their lender's standard variable rate could be paying too much.

So is it worth remortgaging now?

For anyone who is now paying the lender's standard variable rate, the answer is almost always yes. A bank or building society's SVR is almost always the most expensive rate on offer. The number of borrowers who are paying their lender's SVR has fallen steadily as homeowners realise the financial cost, according to John Charcol, the brokers. The number of households paying the SVR is around 25 per cent.

"You should certainly look at remortgaging if you are on a standard variable rate or on an uncompetitive tracker," says Ray Boulger, John Charcol's senior technical manager.

When would it pay me to stay with my lender?

There are some cases when it might still be worth a homeowner's while staying with their existing lender.

The first is if they have redemption penalties for leaving a mortgage early. Although very few mortgages now have "overhanging" redemption penalties that tie a borrower into the SVR at the end of a discount or fixed-rate period, there are still some such mortgages on the market, as well as borrowers who took out such deals a few years ago, when they were more common. Whether it is worth switching will depend on the size of the penalty and the level of the SVR or tracker rate. A mortgage broker can calculate the cost of switching.

The other main reason to stay put is if a homeowner plans to move house soon. Although most mortgages are now "portable" and can be moved to a new property, anyone with an impending move might find it easier to arrange the new mortgage on the new property.

It can also make sense to stay on a lender's existing deal if your mortgage is small, or if you plan to pay some or all of it off in the near future. "The cost of remortgaging is disproportionately high for small loans, especially those below £50,000," says Boulger.

What about fees?

Remortgage fees have certainly increased lately. To add to the complexity, many lenders have a range of very similar mortgage deals, but which trade higher fees against a lower interest rate. Borrowers with smaller mortgages will, generally, find it worth paying a slightly higher interest rate in return for no or lower fees.

For larger mortgages, the reverse applies. For any loan over £100,000, a competitive interest rate will be the most important factor. None the less, remortgaging can cost between £500 and £1,500 so it is important to factor in all costs.

Can I hedge my bets?

A couple of lenders, such as Nationwide and Scarborough, offer "drop lock" mortgages. These are variable-rate deals with the facility to switch to a fixed rate at any time, and could be an option for homeowners who do not want to lock in to a fixed rate right now. But delaying too long remains costly. "Remortgaging still works, especially for anyone on an SVR as moving to a lower variable rate will save them a significant amount on their monthly payments," says Mark Chilton, managing director at Purely Mortgages.

Purely Mortgages has a remortgaging calculator www.purely.co.uk/tools/remortgage.

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