The real cost of remortgaging

Switching mortgages can save borrowers money. But, says Stephen Pritchard, it's not always as cheap as it sounds

The average home owner now changes their mortgage every three years, according to the Association of Mortgage Intermediaries. Just a decade ago, buyers stayed with their lender for seven years or more.

The average home owner now changes their mortgage every three years, according to the Association of Mortgage Intermediaries. Just a decade ago, buyers stayed with their lender for seven years or more.

This makes remortgaging big business, with lenders offering enticing headline interest rates to encourage home owners to switch. But moving mortgages is not always as simple, nor as cheap, as the advertising suggests.

At the very least, a home owner switching loans will need to pay an arrangement fee, for a valuation and for a solicitor to handle the paperwork. "Arrangement fees are typically £300 but are edging up," says David Hollingworth, a director at brokers London & Country. "You might be looking at £300 to £400 in arrangement fees. The valuation depends on the property but is typically £200 to £300 and for a solicitor, the fees for a remortgage are between £300 and £350. So the total is likely to be about £1,000."

One way of cutting the cost of switching home loans is to opt for a remortgage deal where the lender waves some or all of the fees. Halifax, for example, offers remortgage packages with no arrangement fee, a free valuation and the option of £200 cash back towards the borrower's legal costs. Halifax spokesman Paul Fincham says that arrangement is designed to appeal to home owners who may want to switch to Halifax but may not have the cash to hand for the fees.

Borrowers, though, have to meet their lenders' costs in other ways. Opting for a no-fees remortgage package inevitably means paying a higher rate of interest for the duration of the loan. "You can get deals that help with the costs," says Hollingworth. "But there is nothing for nothing: the interest rate is likely to be higher than the lender's cheapest rate."

Working out which option is best means calculating the difference between the rates on offer, adding up the remortgage fees and taking a view on how long you will stay with that lender.

A borrower with a larger mortgage might find that it pays to pay the fees up front, as even a small interest rate saving will make a significant difference to the monthly bills. And the longer the buyer stays with the lender, the greater the savings will be from a lower rate.

A borrower looking for a shorter-term deal might be better off with a fees-paid deal. But home owners who only plan to stay with a lender for a couple of years need to look very carefully at the small print.

At Halifax, Mr Fincham cautions that loans featuring in best-buy tables often charge interest on an annual, not a daily basis. These will prove more expensive than daily interest mortgages for home owners who make overpayments in order to cut their debt. He adds that some lenders have redemption penalties in the first two years of a loan, even if the loan is a variable rate deal and otherwise seems to be penalty free.

These fees can be as high as 90 days' interest. Borrowers need to check that the deal they are considering is free of these fees, unless they are happy to stay both with the lender and on that mortgage for two years. And they also need to check whether similar fees apply to their existing mortgage.

Fixed and discounted-rate mortgages almost always have penalties for the duration of the special rate. Although relatively few lenders have "overhanging" penalties that go on for longer, home owners remortgaging from older-style loans may still be covered by overhanging penalties.

Nor are all penalties alike: some lenders have redemption penalties that reduce every year or every six months. Others maintain the same penalty for the whole fixed or discounted period. Mr Hollingworth points out that waiting just a month to remortgage could result in a significantly lower penalty for on a mortgage with sliding redemption penalties.

London and Country have a remortgaging calculator on their web site (www.lcplc.co.uk), but there is no substitute for taking professional advice from a broker or independent financial adviser. Borrowers who are extending their loans will need to allow for additional hidden costs, such as more expensive life assurance and accident, sickness and unemployment cover (ASU). Home owners who are using a larger loan to extend or improve their homes will also pay more for buildings and contents cover.

But despite the costs, lenders report that interest in remortgaging remains strong. The recent increases in the Bank of England base rates is prompting some home owners to look again at fixed or capped mortgage deals. "Borrowers who might have been freewheeling on a variable rate may have been pushed into action by the base rate rises," says Mr Hollingworth. "But even so, remortgaging is a serious transaction, and not one to be taken lightly."