Should you switch as the home sweet home loan ends?

Laura Howard asks if remortgagingis always the best option as lenders raise their fees
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The Independent Online

If there's ever been a time to consider remortgaging, it's now. People who find that their rates are going up as a result of the credit crunch may want to switch. In addition, Nationwide estimates that 250,000 will soon come off their fixed-rate deals taken out two years ago.

Back in autumn 2005 two-year fixes had dipped to an average of 4.56 per cent, against the 6.41 per cent they're priced at today. That's already a jump of £166 a month on a 25-year repayment loan of £150,000, but if borrowers don't switch to another deal in time, the sums will look worse still.

The average standard variable rate (SVR) – the level of interest to which borrowers automatically revert when their deal matures – is currently 7.75 per cent, says Nationwide. Paying this will result in £295 being loaded on to the monthly repayments, all to fund the same loan.

Matthew Carter, Nationwide's director of mortgages, says: "For some, the increase in payments will come as quite a fright. To absorb some of this shock, borrowers need to consider remortgaging as soon as their deal ends, or before if their lender allows it."

However, remortgaging may not make sense for everyone. This is because the cost of the associated fees has soared in recent years as lenders vie to keep headline rates down.

For example, the average arrangement fee for a fixed- rate loan is now £690, according to financial analyst Moneyfacts, while legal and valuation fees can easily exceed £600. And most len- ders still charge exit fees, at an average of £128.

"Switching mortgage doesn't always pay," warns Lisa Taylor at Moneyfacts. "A small saving in your interest rate could easily be swallowed up in fees."

The case for switching will depend on two main factors, says Ray Boulger, senior technical director at broker John Charcol: "If you have a small mortgage outstanding and it only has a few years left, you should be looking at fee-free deals."

The Woolwich, for example, offers a lifetime tracker priced at 0.17 per cent above Bank of England base rate (so it is currently payable at 5.92 per cent). It comes with no arrangement fee, and legal and valuation costs are met by the lender. The deal is for people who have paid off a large chunk of their mortgage, being available up to 60 per cent loan to value (LTV). Lloyds TSB's fee-free lends up to 80 per cent LTV.

By contrast, if you have a large loan, paying steeper remortgage fees to net the best rate can be worth it. The Halifax, for example, is offering a tracker at 0.36 per cent below base rate (equivalent to 5.39 per cent) until 30 November 2009. It has an arrangement fee of £1,499, which makes sense for loans of £200,000 or greater, says Mr Boulger.

Borrowers with large loans should also avoid percentage-based arrangement fees. Northern Rock, for example, charges a 3.5 per cent fee for a two-year fixed-rate mortgage deal of 5.29 per cent running until 30 September 2009.

This means that remortgaging a £300,000 loan would cost an eye-watering £10,500.

When it comes to assessing the early repayment charges that apply to your new mortgage, borrowers should be aware that they will typically pay either a percentage of the outstanding loan or a flat rate of six months' interest.

Because of developments such as e-conveyancing and automated valuation models (AVMs), the process of remortgaging is now smoother and takes weeks rather than months, according to Rob Clifford, managing director of broker Mortgageforce.

"We tend to find that borrowers who can save £50 a month or more after fees will opt to remortgage."

The costs of a new deal

Average remortgaging fees for a £200,000 home;

Legal fees: £350 to £400, depending on solicitor

Lender valuation: £281

Arrangement fee: £620 (usually applicable only to fixed-rate loans)

Exit fees: from nothing to pay to £295. The average among lenders that charge is £128

Early repayment charges: 2 per cent to 3 per cent of the outstanding loan, though this could fall with each year of the mortgage deal

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