Switch or stick: it's your decision

As lenders scramble to offer better mortgage deals it pays to check carefully before switching to a new one. However, those with negative equ ity could find something to lighten their gloom
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The Independent Online
BORROWERS do not have to look far to see advertisements encouraging them to remortgage their home. With so few properties changing hands, lenders are making up for the lack of new customers by competing for the business of those who already have a loan on a property with a range of discounted and fixed-rate offers.

Choose the right package and you could trim healthy amounts off your monthly mortgage payments. When you consider that the standard variable mortgage rate is 7.25 per cent and that discounts of 5 per cent off these rates are readily available, it is easy to see how big savings could be made.

Not everyone will benefit from remortgaging, however. If you are in negative equity, for example, it is highly unlikely you will save anything. This is because with a negative equity mortgage (see facing feature) you will not get the same interest rate discounts and there will be the cost of taking out a new mortgage indemnity guarantee. Even if you can get a better deal it is important that you isolate both the right product and the right provider. The wide range on offer means it is important to shop around.

The best place to start the search for a better remortgage package is your lender. Institutions are keen to hang on to customers, so if you tell them you are looking around for a better deal, they are almost certain to try to retain your loyalty with attractive proposals. That said, you may have to go a fair way down the road of applying for a mortgage with another lender before yours comes up with the goods.

It should also be noted that your lender does not have to come up with a lower rate for its deal to be your best bet. If you remortgage with the same organisation you immediately save on many of the fees. It could be worth staying put to avoid spending several hundred pounds just to shave a few pounds off your headline interest rate.

The cost of switching lenders soon mounts up. First, there could well be a fee because you settled your original loan early: you may find yourself with a bill for six months' interest.

Your new lender will need to confirm the value of your property: another bill. It may also charge an arrangement fee of, say, pounds 250. M'learned friends will also be involved and solicitors' fees can be substantial.

If you are borrowing more than 75 per cent of the value of the property the new lender will also ask for a mortgage indemnity insurance guarantee premium (or MIG, often referred to as a high loan-to-value premium).

This one-off charge buys a policy that protects the lender in case you default on the loan. It is important to know, however, that if you paid a similar charge on your old mortgage you will not receive a refund.

As well as redemption penalties on your existing mortgage, also look out for such penalties on any new deal. If the new rate applies for a fixed period, it is possible that the penalties will apply for longer. For instance, you may find that a special two-year deal in fact carries a five-year lock-in and punitive charges for early withdrawal.

Another important consideration when contemplating changing your borrowing arrangements is any loss of Miras tax-relief (Mortgage Interest Relief At Source) you might suffer. If you and a partner have had your loan for a number of years, you may each be enjoying the benefits of (double) Miras but if you take out a new mortgage you will be restricted to one lot of relief.

Equally, if, in the past, you took out a home improvement loan you may have qualified for Miras. Such loans no longer qualify for relief, however, so if you make fresh arrangements, the savings in terms of interest rates may be offset by the loss of the tax relief.

By switching lender, but not if you simply remortgage with the same lender, you also reduce your entitlement to income support to help pay the mortgage should you lose your job.

If you have also seen a change in your employment circumstances since taking out your present loan, you may find a change in lenders' attitudes.

More people are becoming self-employed, moving to contract work, and perhaps combining income from a number of sources. Lenders still prefer those in "stable" traditional employment.

You may therefore receive a less than enthusiastic reception if you fall outside that norm.

Securing a better interest rate by renegotiating with your existing lender or switching to a new one can be a powerful spur to remortgage but there are also other reasons for doing so. If your house is worth more than the outstanding debt (known as positive equity), a new loan could be taken out for a sum closer to the actual value of the property.

Known as equity - or capital - release, this might suit people who bought their houses well before the property boom of the 1980s. A house bought for pounds 30,000 in 1979, for example, might be worth pounds 80,000 today. This means that once the original loan has been cleared, the remortgage could free up to pounds 50,000. This capital could then be used to pay, say, school fees, and is likely to be the cheapest way of borrowing you will find.

That said, those with anything other than a straightforward repayment loan will need to consider how the increased loan is going to be repaid at the end of the term. Whether the investment approach involves life insurance policies, pension schemes or other vehicles such as personal equity plans, more money will have to be pumped in if a greater payout is to be achieved.

The beauty of an equity release scheme, provided you can afford to service the increased loan, is that you can use the capital for any purpose you choose. Many borrowers decide to consolidate their various debts by using the proceeds of the deal to settle outstanding credit card and hire purchase bills. This can be an attractive proposition since the interest rate charged on the loan is likely to be much lower than that on any other way of borrowing.

It is also common for the proceeds of a remortgage to be pumped into a business, perhaps to fund expansion or ease cashflow difficulties.

It is worth emphasising, however, that any increased debt will require increased servicing. Using remortgage money to solve one problem will only result in another if the interest payments cannot be met. Remember, the security for the debt is the family home.

Couples facing divorce will often use remortgaging as a way to create sufficient cash so that their joint wealth can be divided equally.

That said, such arrangements can be stressful and complex if one partner continues to live in the marital home and pays the costs of the increased loan, but this can be preferable to the property being sold.

o Ian Darby is marketing director of John Charcol, a mortgage broking firm.