Save thousands on your home loan

If you have spare cash then go for a remortgage, says Isabel Berwick
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The Independent Online
MOST of us just pay the mortgage each month and forget about it. But if you have a little spare cash then you should think about two relatively straightforward changes.

The first step is to see if you would save money by swapping to a cheaper loan with another lender. If that doesn't appeal - or you are locked into a special deal which charges a cash penalty for early exit - then you may be able to make extra payments into your existing mortgage, on a monthly basis or with lump sums.

If you can take both steps, you should save thousands off your loan.

Simon Tyler, managing director of independent mortgage broker Chase De Vere, says: "Any borrower who is currently paying the variable rate, with no financial penalties charged for moving lender, would be well advised to consider switching lender today to make an immediate saving in cash flow before Christmas."

If you are looking for a remortgage deal, you have two choices. The first is to opt for another variable-rate deal, but choose one that is run as a flexible or lower-cost mortgage.

The other option is to remortgage to a fixed rate to improve cash flow over the next two or three years. You could then invest any spare cash you would have spent on the mortgage, and get a higher rate of interest than you are paying on the loan. At some point in the future, you could pay off a lump sum.

Some fixed-rate mortgages allow you to make regular over-payments and/or pay in lump sums. Among the lenders allowing this are Bristol & West, Northern Rock, Woolwich, Skipton and Norwich & Peterborough. Check how often the capital owing is recalculated.

If it is done on an annual basis you should only make extra payments at the end of the year. (A big advantage of flexible deals is that they recalculate capital daily or monthly, so you always pay interest on what you actually owe.)

Because interest rates are on the way down in the long term, it is probably not worth taking out a fixed rate for longer than three years. Borrowers looking for a five-year deal should consider capped rates. These guarantee you won't pay too much over the odds for your mortgage - and you will make modest savings if rates fall.

If you have a variable-rate mortgage you will be paying around 8.9 per cent today; a switch to, say, 6 per cent could save you around pounds 120 a month. You have to set your remortgaging costs against that. If you pick a deal with no "sweeteners" for those swapping from another lender then you will have to pay around pounds 1,000 to change your mortgage - assuming you are not locked into an agreement which charges a penalty for early exits.

Mortgage experts suggest that you should bear in mind the size of your loan before you pick a remortgage. Anyone with a loan of pounds 100,000-plus should consider paying full fees to get a lower interest rate, on the basis that you will claw back the costs very quickly by making big savings on mortgage payments. If you have a smaller loan, it is much more important to keep the cost of remortgaging down.

But check the redemption penalties. These keep you paying standard variable rates - potentially for several years - after the special offer ends. Customers are usually charged six

months' interest payments or 5 per cent of the original loan to get out of the deal.

In the medium term we may see the end of this practice. The Council of Mortgage Lenders is planning to tighten the rules on lending so that there is no chance anyone could be taken by surprise by the "lock in" clause at the end of a special offer period.

However, if lenders are forced to be more upfront about the details in their small print, they will probably put together deals with less attractive headline interest rates.

Flexible mortgages are an interesting new alternative and look likely to take the remortgage market by storm over the next few years.

What started as an innovation by Legal & General in 1995 is now offered by more than 20 lenders, including some of the big traditional names.

All of these deals offer you the chance to vary the repayments you make on your loan. If you can overpay, through lump sums or regular payments, then you will save thousands of pounds and cut years off your repayment term.