Jumping with the rates: Neasa MacErlean looks at the high costs of trading in your mortgage

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The Independent Online
A NEW trend in the housing market is for borrowers to try to remortgage their properties to exploit the new lower rates.

Interest rates on five-year fixed mortgages were more than 2.5 per cent higher 12 months ago than they are now. According to John Charcol, the independent mortgage advisers, there is now substantial demand from people who tied themselves to rates of 10.65 per cent last year.

John Charcol calculates that the financial benefits of remortgaging to a 7.99 per cent rate now outstrip the associated costs after 20 months on a pounds 50,000 loan, or after 17 months on a pounds 100,000 loan.

Both these projections show just how expensive a remortgage is for people who are already on fixed rates.

The cost of a remortgage on a pounds 50,000 fixed-rate loan is calculated at just over pounds 1,800. For a pounds 100,000 loan, it comes in at about pounds 3,400. Three-quarters of the costs comes from early redemption penalties charged by lenders. The longer the loan, in general, the larger the penalty.

On five-year fixed loans, many lenders are now charging a penalty of six months' gross interest payments. Two-year fixes tend to attract a two- month penalty.

But the longest-term lender in the market, Leeds Permanent, has a tiered structure. It charges a six-month penalty during the first five years of its 25-year 11.25 per cent fixed mortgage. This dwindles to one month after 10 years. There is no penalty for a borrower who remortgages a property by taking out another Leeds Permanent loan.

Borrowers on variable rates who want to remortgage will not have to pay any early redemption penalty.

However, those who have mortgage tax relief that includes a home improvement loan taken out before 1988 need to think carefully; they will normally lose their relief when transferring a loan. Unmarried couples receiving double mortgage tax relief will also lose it if they switch lenders.

For home-owners who have negative equity, remortgaging to another lender is usually out of bounds. Few lenders are granting 100 per cent mortgages, let alone anything higher. Remortgaging is generally only possible if the borrower has the cash to cancel out the negative equity.

For those who can remortgage, there has never been a greater abundance of products. The Portman Building Society says that last month, for the first time ever, the number of fixed- rate products available went over the 100 mark. Some of these are clearly targeted at the remortgage market.

Abbey National, for example, offers a pounds 250 contribution towards the legal or valuation fees of those who remortgage from another lender. An existing Abbey mortgage customer who moves house can get a free valuation and pounds 200 towards legal fees.

Meanwhile, Sun Alliance is offering to cover the costs of valuation fees on remortgages, and will also absorb the legal costs if the borrower uses its solicitors.

John Charcol estimates that the remortgaging process will usually take between four and eight weeks.

Many people are trying to jump on the bandwagon just at the wrong time. The Portman reports a lot of interest in remortgages - particularly from people on variable rates with the centralised lenders. These institutions lagged behind the building societies in bringing rates down, but some are now starting to offer very competitive deals.

Their reliance on the wholesale markets has become an advantage now that wholesale funds are becoming cheaper than retail funds.

(Photograph omitted)

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