Loan-rate switch may be no quick fix for borrowers: The costs may far outweigh any benefit in shifting your mortgage from a variable to a fixed rate

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The Independent Online
FIXED-RATE loans look attractive in the current climate, as they offer the chance of locking into rates that may not fall any further.

Despite last week's cut in base rates, it looks unlikely that the big lenders will immediately follow suit with further reductions in their rates.

But the costs of remortgaging to take advantage of one of the vast number of fixed rates on the market can easily eat up most or all of the savings offered by moving to a fixed rate.

In addition to an arrangement fee of up to pounds 295, anybody who wants to switch from a variable-rate to a fixed-rate loan faces legal fees of between pounds 200 and pounds 300, disbursements of around pounds 150, and land registry fees that can vary between pounds 150 and pounds 1,000, depending on property to be registered.

It also means having the house revalued for the loan, and the valuation will cost about pounds 150.

Another cost that can tip the balance is the mortgage indemnity premium, which has to be paid on loans that are above a certain proportion of the property's value. For example, on a pounds 60,000 remortgage, where the loan is 90 per cent of the valuation, the mortgage indemnity premium would be around pounds 535.

This is calculated on a percentage of the amount to be borrowed above 75 per cent of the value. The total cost, therefore, of remortgaging a pounds 60,000 house could be more than pounds 1,400.

This could be further inflated if the borrower has to pay a redemption penalty on the existing mortgage.

Redemption penalties depend on the type of loan, but can amount to as many as six monthly payments, if the borrower already has a long fixed- rate mortgage.

The total interest saving on a fixed rate depends on the prevailing variable rate and the length of the fix.

Typically, the variable interest rate on a pounds 60,000 loan would be 7.64 per cent - which represents an annual interest bill of pounds 4,011.

The annual payments on a two-year, fixed-rate loan, with an interest rate of 6.39 per cent, would total pounds 3,345.75.

The borrower's total interest saving over the two years would be pounds 1,300 - pounds 100 less than the cost of remortgaging, assuming they have to pay mortgage indemnity but do not have redemption penalties. The savings made on a fixed rate will shrink if the prevailing variable rate is cut, but will increase if the variable rate rises.

With such fixed costs, the savings for many people would be marginal.

Pamela Kingsland, a banker with Singer & Friedlander, decided to remortgage her property through the Abbey National for pounds 78,000. She had a variable-rate 7.9 per cent loan with the City & Metropolitan Building Society; the loan she has chosen to switch into is a two-year fixed rate at 6.39 per cent.

Over two years, the total interest saving would be pounds 2,256. In Ms Kingsland's case, the costs of remortgaging are pounds 500 of legal fees, a pounds 250 arrangement fee, and pounds 175 for the valuation.

She also had to pay a mortgage indemnity premium of pounds 1,032. In total, her remortgage costs were just over pounds 2,000, without a redemption penalty from the previous society.

Ms Kingsland said that one of the main reasons she wanted to move to the Abbey National was to take advantage of other offers as they came along. She said: 'I think that interest rates are pretty much towards the bottom.'

Ian Darby, marketing director of the mortgage broker John Charcol, said: 'Some fixed rates may save you a fortune. But under some circumstances, it is clearly best advice to stay with your existing loan.'

Midland Bank is offering to pay the cost of switching mortgages for home-owners who move their home loans to Midland before 28 February. It is currently offering a five-year fixed rate at 7.25 per cent and a two-year fixed at 5.95 per cent.

(Photograph and graph omitted)

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