Are you paying too much?: It is cheap to borrow money - so why is your mortgage so expensive? Anne Spackman talked to the experts about cutting the cost

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The Independent Online
When Charles Phillpot, the marketing director of Savills, was buying his house a year ago, he saw an advertisement for John Charcol, the mortgage brokers. He followed it up and saved himself thousands of pounds. Friends and colleagues copied his example, with similar results.

This week, as a direct consequence of Mr Phillpot's experience, Savills announced a link-up with John Charcol, and will now be recommending the brokers to all its clients who seek mortgage advice.

It is not that John Charcol, or any other mortgage broker, has found a magic formula; it is simply that money is very cheap to borrow at present and hundreds of organisations are trying to lend it.

A commonly held view in the City is that, whatever happens to base rates (now at 5.5 per cent), variable mortgage rates (now between 7.5 and 8 per cent) cannot fall much below 7 per cent (John Garfield, the chief executive of John Charcol, reckons that 6.55 per cent is just about conceivable).

What usually stops people from fixing their mortgage rate is the fear that they could lose if variable rates fall any lower. At present, if you can fix your mortgage below 7 per cent for the next five to seven years, there is little risk of that happening.

The average mortgage rate for every five-year period in the past 25 years has been about 12 per cent. And most commentators believe that we are in for a period of stability. So why aren't we all renegotiating our mortgages?

Mr Garfield is amazed that there has not been a stampede. 'We have seen the quality end of the market come to realise that to take some advice is a good idea. But from the general public's point of view, it is ridiculous not to be asking whether you can get a better mortgage deal.

'There is so much money in the system, with banks becoming profitable again. The attitude of the lenders is that, with house prices so low, property does not seem to represent a risk. The 95 per cent mortgage, even 100 per cent, is reappearing. Everything is on again.'

I suspect there are two reasons for the inertia. One is that most people have seen their mortgage payments halved over the past four years, and consider that to reduce the pain still further may not seem so urgent. The other reason is the reverence with which we tend to regard our mortgages: we behave more like grateful beneficiaries than consumers.

Simon Tyler of Chase de Vere Mortgage Management thinks borrowers should view mortgages like any other household goods. 'They have the same in-built obsolescence,' he said. 'People used to save for years, get a mortgage and stick with it for life. Our philosophy is that you have to manage your mortgage.'

Of course, you can manage it yourself. You can either ask your current lender to match a better offer you have seen elsewhere, or go directly to a new lender.

The advantage of the DIY route is that it costs you nothing. The disadvantages are that you may not end up with the best deal, you may lack the professional's bargaining power and you may not be able to spare the time required. With about 750 schemes currently available, it is difficult to know about them all.

Employing a mortgage broker makes more sense for some than for others. What you must have is a high enough income, a good repayment record and a reasonable amount of equity in your property. The professional in a secure job, borrowing a large but feasible sum is likely to benefit most.

What you should not have are complicated circumstances, such as a freehold flat, a flat above a fast-food outlet, a sitting tenant or a strangely constructed property. High-risk borrowers with no credit cards, stretching themselves to buy an awkward properties, are wasting their time.

The average mortgage fixed by John Charcol is pounds 130,000, a figure composed of large numbers of customers borrowing pounds 60,000 to pounds 70,000, and a few borrowing pounds 300,000 to pounds 500,000. The firm's link-up with Savills, whose average property sells for pounds 345,000, may push that figure up. At Chase de Vere Mortgage Management, the average is a pounds 120,000.

Most mortgage brokers will charge about pounds 225 for fixing your mortgage. If, like Mr Phillpot, you are taking out a new mortgage, that will be the only extra fee. But if you are switching your mortgage, you will have to pay a new set of lawyer's and valuation fees, bringing the total costs to about pounds 900, depending on the size of your house. And if you are paying a fixed rate on your existing mortgage, you will have to pay a penalty - but (as in Case 2 below) the exercise may still be worthwhile.

One reason why Mr Phillpot went to John Charcol was because the company has no tie-up with an insurance company. He refused to take out the insurance policy that his new lender, National & Provincial, was suggesting. 'When your mortgage is a reasonable size, you are in a good bargaining position,' he said.

As a banker's son, he cautions against going to anyone other than a reputable broker, or taking out a mortgage with anyone other than a well-known lender. 'I would rather pay half a per cent more, than take that risk,' he said. 'The point is, all of us have different requirements depending on our income, the regularity of our income, our age and all sorts of factors. In each case, there is a different mortgage which suits us best. It may not always be the cheapest.'

We put three case studies to Mr Tyler, of Chase de Vere Mortgage Management, and asked him to come back the same day with his best advice. This is how the figures (for gross interest repayments, ignoring tax relief) worked out:

Case 1

Family with two earning parents and two children. First salary pounds 50,000, second salary pounds 25,000. Bought house in 1990 for pounds 200,000 with pounds 150,000 mortgage. Needs some upgrading.

Current monthly payment at 7.74 per cent, pounds 968.

Options: five years fixed at 6.75 per cent, pounds 843, saving pounds 125 a month. Three years fixed at 5.95 per cent, pounds 743, saving pounds 225 a month.

Costs: fixing fee, pounds 250; lawyer's fees, pounds 450; valuation fee, pounds 200. Total costs, pounds 900.

Total savings, assuming interest rates remain the same: five years fixed, pounds 6,600; three year fixed, pounds 7,200.

Alternatively, they could borrow another pounds 20,000 to get their house finished. Three years fixed at 5.95 per cent for pounds 170,000, pounds 842 a month, saving pounds 126 a month, with pounds 20,000 cash.

But a pounds 170,000 mortgage would take their borrowing above 75 per cent of the value of their house, so they would have the additional cost of an pounds 800 one-off mortgage indemnity. Savings over three years ( pounds 4,536 less costs of pounds 1,700), pounds 2,836, plus pounds 20,000 in cash.

Case 2

Single doctor, aged 34, earning pounds 35,000 (doctors qualify for more favourable 'professional' mortgagee status). Has three mortgages on same property taken out over past 10 years, after bank loans were rolled into mortgages. Total mortgage of pounds 105,000 on pounds 150,000 house. Paying fixed rate of 11.25 per cent with one year to run, pounds 984 a month.

Option: three years fixed at 5.95 per cent, pounds 520 a month, saving pounds 5,568 a year. Penalty for leaving fixed rate ( pounds 2,900 plus pounds 900 normal costs), pounds 3,800. Saving over three years, pounds 12,904.

Case 3

Single, young accountant, basic salary pounds 20,000. Bought one-bedroom flat in 1988 for pounds 70,000 with pounds 65,000 endowment mortgage at variable rate. Flat now worth pounds 60,000. Job secure. Wants to move.

Solution: talk to lenders, who may operate a negative equity scheme, or else ask the broker to talk to them. Cost of existing pounds 65,000 mortgage at 8 per cent, pounds 433. To convert it to fixed three-year rate of 5.95 per cent, cost pounds 322. Let flat with lender's permission.

Chase de Vere Mortgage Management (071-930 7242);

John Charcol (071-820 8090).