Mortgage makeover: A new fix unsticks the old

Simon Tyler saves a couple more than pounds 200 a month

Nick Henney and his partner, Deborah Owen, live in London with their two children, Faye,10, and Dominic, 8. Both work full time as managers for social services, with a combined income of around pounds 60,000. They bought their home in April 1995 for pounds 145,000. They spent a substantial amount on renovation and it is now worth about pounds 250,000. Although the couple are happy with this increase, the 10-year "best buy" fixed-rate mortgage they took out in 1995 is now looking very expensive, at 9.49 per cent. They want to re-mortgage but don't know where to start.

The problem

Like many home buyers in the mid-1990s, Nick Henney and Deborah Owen opted for a fixed-rate deal because they were stretching themselves to buy the house. Mr Henney says: "We wanted to avoid for as long as possible all the monthly recalculations that go with rate changes. Thinking that the rates would surely increase, we took a 10-year fixed-rate mortgage with TSB at 9.49 per cent." This interest rate now makes them "shudder", but as their incomes were not expected to rise, budgeting for monthly payments made sense

The TSB fixed rate is expected to run until April 2005. The couple have total loans of pounds 109,000 outstanding. About pounds 60,000 of the loan is interest only and linked to their existing endowment policies, due to mature in 2012. The rest was arranged on a repayment basis over the same period. However, only pounds 80,000 is linked to the fixed rate; the rest follows TSB's variable rate.

Because of the movement in interest rates, a redemption penalty on the loan would be around pounds 4,500. Even so, the couple feel they ought to be able to do better.

The solution

The main issue for anyone trapped on this kind of fixed rate is to consider whether or not it's worth paying the redemption penalty to get out of the loan. In general terms, if you have several years left on a fixed rate it is usually worth paying up and swapping to the extremely competitive deals that have been available over the first six months of this year.

The couple's monthly costs, excluding existing endowments, are pounds 967. We produced an offer involving a monthly cost of pounds 755 - a reduction of pounds 212.

We were able to secure funds to replace the entire mortgage, linked to a five-year fixed rate of 5.49 per cent with the Portman Building Society. The headline figure is attractive, but for Mr Henney and Ms Owen the savings were not as clear- cut as they may seem.

With a total loan of pounds 109,000 outstanding, an apparent saving of 4 per cent interest on an pounds 80,000 repayment deal should save them pounds 4,000 a year, or pounds 333 a month. It is always wise to match the new repayment term to the original mortgage term, so in this case we needed to arrange a new, 13-year facility.

The new mortgage has redemption penalties that run for the length of the five-year term (until 1 May 2004) but do not extend beyond that date. So when the term is up the couple can immediately swap into a new deal. This allows them maximum flexibility. And although the redemption penalties are the equivalent of four months' interest, they could repay up to 25 per cent of the loan (approximately pounds 28,000) at any stage without penalty.

When you remortgage it is also worth looking at the associated monthly costs. Many people stick with the expensive home insurance packages sold by lenders when they could be saving hundreds of pounds a year by sorting out a new deal with a direct insurer over the phone or by using an insurance broker: most insurers offer cheaper policies than those sold to "captive audiences" in banks and building societies.

We were able to replace Mr Henney and Ms Owen's buildings and contents insurance - which was costing pounds 768 a year - with a policy costing pounds 588.

We also referred them to an independent financial adviser who specialises in life insurance and income-protection advice. The couple were able to reduce the costs of the life assurance attached to the repayment element of their mortgage by pounds 12.50 per month or pounds 150.00 per year. This saving will increase in the future, as the previous policy had two further premium increases expected in the remainder of the term.

As luck would have it, this policy was arranged by our advisers with Scottish Widows. So, as well as saving pounds 150 per year, it looks likely that they will receive a further pounds 500 if Scottish Widows is bought by Lloyds TSB. All these savings reduce their redemption penalty, in effect, as they have paid TSB pounds 4,333 to escape the fixed rate.

Overall, the annual savings from refixing the mortgage and its associated costs amount to approximately pounds 2,900. This should add up to about pounds 17,500 of savings, which is reduced to pounds 13,000 when we take into account the setting-up costs, redemption penalty and potential credit from the sale of Scottish Widows.

The verdict

Nick Henney is impressed, and the couple have already gone ahead with the remortgage. "The advice was excellent and Simon put it in a way that was easily understood. We have saved pounds 200 a month and the reduction includes borrowing the redemption penalty on top of the mortgage. We are dead chuffed."

n Simon Tyler is managing director of independent mortgage brokers Chase de Vere Mortgage Management, 0171-930 7242.

n If you would like a mortgage makeover, please send details of your personal circumstances and current mortgage (if any) to: Mortgage Makeover, Personal Finance, Independent on Sunday, London E14 5DL. Or e-mail to i.berwick@independent.co.uk. All participants must agree to having their photo and brief personal details appearing in the paper.