Mortgages: Keep the home, move the loan

Falling rates and strong competition among lenders make it a good time to borrow. Here we show how to get the best deal: Remortgaging can slash your repayments, writes Kathleen Hennessy

One of the more positive outcomes of the housing boom in the late 1980s and early 1990s was increased activity in the remortgaging market, where borrowers swap the loan they already have for another loan at a better interest rate.

Remortgaging is now big business, accounting for three out of 10 property loans in the last quarter of 1998. That is good news for potential borrowers because intense activity spells competition - and when lenders compete for business, they tend to slash their rates.

This is not just an option for people moving home, either; you can switch lender without changing your address because all you're doing is paying off your debt with a new loan. You can even remortgage without changing lender if you opt for a new deal with your existing provider.

If you bought your home some years ago, the chances are that its value has gone up. If so, you should be able to remortgage using the in-creased value of your property to broker a new loan. For example, if you took out a pounds 65,000 mortgage on a property valued at pounds 68,000 - a loan of around 95 per cent - and the property is now valued at pounds 80,000, you could negotiate a new loan on the basis of needing to borrow only 80 per cent of the value of your property. And the less you need to borrow, the better the rate lenders are likely to offer (see our best rates tables on page 10 for what's on offer this week).

So why isn't everyone remortgaging? Because there's no such thing as a free lunch. You'll have to pay at least an arrangement fee to the lender or broker or both, which can take the form of a flat charge or a percentage of the amount borrowed. Chase de Vere, for example, charges 1 per cent of the loan as an arrangement fee. "But where a lender pays us to sell its products, we rebate that much to the customer," explains Simon Tyler, for the broker. So on a pounds 65,000 mortgage, the fee would normally be pounds 650. But if the mortgage lender paid Chase de Vere pounds 300 commission to sell the mortgage, the customer would only be charged pounds 350.

You may also have to fork out for valuation fees and legal fees. And there may be other strings attached. You might have to take out the lender's own buildings and contents insurance, for example, or accident, sickness and unemployment insurance. Although this may seem a small price to pay for the substantial savings you could make on interest payments, you're unlikely to get good value for money from a compulsory insurance policy.

Your new mortgage may have a long lock-in period, particularly if you go for a fixed, discounted or capped rate. This period may extend way beyond the fixed term and it will tie you to that lender for the full period, unless you pay to get out.

For example, Alliance & Leicester offers a rate of 3.99 per cent fixed until 5 January 2001, but any repayment of the loan in the three years following the end of that fixed period will result in a redemption charge of up to nine months' interest. And by that time you'll be back on A&L's standard variable rate.

Promise, from Winterthur Direct, is a remortgage deal specifically aimed at people moving loans rather than homes. There are no arrangement fees and no lock-ins after any fixed rate ends. In many cases, borrowers won't even need to have a new survey carried out on their property.

Offering this flexible a deal means interest in Promise will be quite strong - which in turn means the company can cherry-pick its customers. People with less than 20 per cent equity in their home need not bother applying.

The two most common obstacles to remortgaging are redemption penalties on your existing loan and negative equity. Penalties are usually calculated as up to six months' interest or a percentage of either the original loan, the outstanding balance or the sum already repaid. This is usually set at 5 per cent. On a pounds 65,000 mortgage at 6.5 per cent, this could cost from pounds 2,016 for six months' interest up to pounds 3,250 for a 5 per cent charge on the advance.

n Contacts: Chase de Vere, 0171-930 7242; Winterthur, 0171-929 2181.