Remortgaging - is it worthwhile?

MONEY TALK
By Richard Brown
Chief Executive, online comparison service Moneynet

Can you really save money by rearranging your mortgage every few years - or is it all a con perpetuated by lenders and brokers to bolster their profits?

The short answer is "yes", you can save money.

In many cases borrowers can save thousands of pounds, maybe tens of thousands, over the term of their mortgage by moving around from lender to lender to take advantage of cheap deals.

However, before you rush off to the nearest broker there are some important points to consider and pitfalls to avoid.

Important costs

First of all there are costs involved in moving your mortgage.

The first thing to do is to estimate the likely costs involved in moving your mortgage Richard Brown, Moneynet

The lender will want to have your property valued by a surveyor, you will probably need a solicitor and the new lender is quite likely to charge you an arrangement fee.

The first thing to do therefore is to estimate the likely costs involved in moving your mortgage.

Both legal fees and valuation fees vary depending on the value of your property and the size of your mortgage.

As a guide, for a mortgage of £100,000 on a property valued at £250,000 you could expect to pay £350 in legal fees and £250-£300 for a valuation.

In addition to these costs the new lender is quite likely to charge you an arrangement fee which could be anything up to about £600 - even more in some cases.

So, on the face of it you will need to allow at least £1,000 to cover your fees. You then need to decide if the saving you will make by getting a lower interest rate will make the deal worthwhile.

Crucial comparisons

You can do this by comparing the total monthly repayments for the new mortgage with your existing mortgage, taking into account the period of time you are likely to have the new mortgage for.

Once you have done this you are armed with the first piece of information you need.

However, before proceeding you should talk to your existing lender to see if they are prepared to offer you a better deal, as many lenders, when faced with losing a customer, will suddenly find a better deal to offer you.

This will not only save you money on fees but also the headache of dealing with the transfer.

You should also have a look at new "fee free" deals which are on offer from some of the lenders.

These will generally offer to pay the legal fees and valuation fees associated with the re-mortgage and can be particularly attractive for smaller mortgages where the costs can easily outweigh the saving.

Potential penalties

In the event that your existing lender is unhelpful and you decide you still want to move your mortgage there are a number of other points to consider:

• Check that your existing lender will not charge you a fee for redeeming the mortgage. This is particularly likely if you were on a fixed or discounted rate when you took the mortgage out

• Check the terms of the new mortgage you are being offered. Are there penalties if you want to move away from the new lender at some time in the future? If so, what are the terms?

• Be particularly wary of products that impose extended tie-ins, ie penalties that last longer than the term of any special rate you are being offered. After the special rate has finished you have to stay with the lender for a period of years on their standard rate before you are able to re-mortgage again

• If you are borrowing a high percentage of the property value check whether or not you will be charged a Higher Lending Fee by the lender. This can apply if you are borrowing more than 75-80% of the property value. If this does apply then look for a lender that doesn't charge it

New safeguards

Although this all sounds somewhat complicated, any lender or broker you go to now is obliged to provide you with a Key Features Document.

More information for borrowers

This will outline all set-up costs as well as monthly costs for the mortgage they are recommending. This has to be in a standard format so it is easy to compare one deal with another.

Finally, look out for the standard of advice you are getting from whoever you are talking to. Whether they are a broker or lender they have to provide you with what is called an Initial Disclosure Document.

This is an important document as it will outline the level of service they are providing. This can be anything from information on a range of products (allowing you to select the one you like) to advice and information on products from the whole of the market.

The important thing to remember here is, that unless you go for a full advice service, you will relinquish your rights to claim compensation under the Financial Services Compensation Scheme in the event you subsequently find you have been sold an unsuitable product.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.