Remortgaging? Look before leaping

Interest is down, but home-owners need to cover costs before moving to a new lender, says Stephen Pritchard

Home-owners switching between lenders also face paying exit fees for closing down their existing mortgage. These fees have risen from a nominal £50 to £250, even £300. And borrowers who opt to stay with their current mortgage lender might have to pay a "product transfer" fee, in addition to the arrangement fee for any new deal they take out.

A borrower who stays with their existing lender will at least avoid legal fees, otherwise around £350 for an average property. But if you want to borrow more, lenders charge a further advance fee, and may ask for a new valuation, to support the larger mortgage.

In all, remortgaging costs can come to £1,000, even £1,500 for a larger or more expensive property. A new mortgage has to offer substantial savings to cover these costs. Even with lower interest rates, it might be hard for borrowers with small loans to justify switching lenders. It could also be a false economy to switch if you plan to move house in the near future.

Calculating whether to switch, and how much it could save, is a complicated process, especially when it comes to evaluating lenders' incentives and deals, such as free valuations or cash-back. However, a number of websites - including brokers London & Country (www.lcplc.co.uk) and Moneynet (www.moneynet. co.uk) - have interactive calculators that can help.

"With last week's reduction in base rates, now could be a good time to consider remortgaging, particularly for those who are stuck on their lenders standard variable rate," says Richard Brown, Moneynet's chief executive. "There are a number of good fixed-rate deals around, and quite a few lenders who will pay the associated costs such as valuations and legal fees."

Analysis of the market by Moneynet shows fees of £484 for a two-year fixed- rate mortgage, at 4.39 per cent with Nationwide, with free legal work and valuation, and 4.59 per cent for a five-year fixed rate with the same terms. The Newcastle Building Society offers a lower rate - 4.46 per cent for five years - for borrowers willing to pay the fees themselves. The arrangement charge is £499.

Incentives such as free valuations can mean that it is scarcely more expensive, and sometimes cheaper, for home-owners to switch lenders than to take a new deal with their current bank. Existing lenders will generally offer a deal if they think they might lose business, but this must be set against the best rates available on the market.

To complicate matters further, it can actually be more cost-effective to pay fees than to opt for a fee-free deal. The interest rates on mortgages without fees assistance are generally more competitive. At Moneynet, Brown says that for borrowers with a mortgage of £50,000 or less, it usually makes sense to take a fee-free deal. For larger loans, of £100,000 or more, it is the headline interest rate that is most critical. "In between, it is really a question of doing the sums," he says.

And the calculation will also depend on how long a home-owner or buyer plans to stay with the lender. Someone who is likely to switch lenders after a couple of years might want to opt for a fee-free package. But the longer the borrower stays with the lender, the greater the benefit of a lower, headline interest rate.

For a short-term deal, such as a two-year fixed rate, it can also pay to take a mortgage with a lower arrangement fee and a slightly higher interest rate.