Understand the remortgage process and save ££££s

It's time to remortgage. You may be coming to the end of a fixed rate deal; you may need to release equity to pay for that 60" screen because you were convinced England will make it to the Final; or you need a cheaper mortgage repayment rate just to stay financially afloat. Or you simple want to make savings of £93 a month, which figure, according to Bradford & Bingley research, is the trigger point at which borrowers take the trouble to seek a better deal.

How much trouble and is it worth it? Are you one of half a million homeowners who, research says, each squandered £370 over a three-month period by simply delaying a switch from their lender's standard variable rate (SVR)? Whatever your reason for remortgaging, you're entering a market that offers some 8,000 mortgages provided by more than 120 lenders. It's full of fixed this, discounted that, flexible the other, hidden fees, variable and 'lifetime' options.

How to select what's right for you, whilst still retaining a reasonable level of sanity? First be aware that you can't compare on interest rates alone. Flexibility and the existence of fees can render such a comparison invalid. In contrast to last year, the tendency now among lenders is for higher headline interest rates, but lower or waived arrangement fees.

Think long term and don't risk wasting £1000s over the period of the loan for the sake of saving a few £100s at the start of the deal. For example (Nationwide), a 4.79% rate with a £399 arrangement fee saves almost £7000 over a 25 year £100,000 mortgage when stacked against a rate of 5.19% with no arrangement fee. A useful rule of thumb is: the bigger the mortgage, the more important becomes the interest rate, rather than the arrangement fee.

Other fees proliferate, including broking, reservation, completion and early repayment fees. Some can add the equivalent of 1% to the interest rate. For example, a 1.5% fee on a two year fixed ratemortgage means the real interest rate is effectively 0.75 percentage points higher than quoted. It's critical to cost them all in, including exit fees; though they might seem a long way off they can be as high as £295 (Alliance & Leicester).

The Financial Services Authority has recently warned that exit fees must be justifiable; there's concern that the small print of contracts allows arbitrary hikes. An example is Abbey's exit fee which has increased from £85 to £225 in the last five years.

Can your mortgage be a flexible friend?

You might prefer a flexible mortgage, which can allow overpayment, useful if you envisage an increasing income, or want to explore the possibility of offsetting, whereby interest is charged on the difference between your savings and the size of the home loan. Fixed rate mortgages are losing their attraction and competitiveness because of the upswing in money market 'swap' rates, the price at which mortgage lenders buy funds in the City's money market to underpin their loans. Many experts believe variable rate mortgages will become more popular as fixed rate deals increase in price.

The fixed interest rate mortgage's appeal is that you are not at the mercy of base rate fluctuations. But there are discount mortgages available that act as a buffer against possible Bank of England interest rate rises, which work out cheaper than a fixed rate. For instance, Bank of Scotland's two year discount of 0.51% on the base rate gives an actual rate of 3.99%. A base rate tracker is another option, particularly if the base rate falls, and recent months have seen the appearance of 'lifetime' home loans which could obviate the bother of shopping around every two or three years for a new fixed rate.

Woolwich maintains its lifetime tracker mortgage, for anyone borrowing £150,000 or less, cannot be bettered by the best two year discount variable offer; it is guaranteed to stay 0.29% above base rate, so the current rate is 4.79%. Woolwich also offers free valuation and legal work and does not charge an application fee.

Remember that any headline rate can be more expensive than it appears if the lender calculates interest on an annual rather than a daily basis. This is irrelevant for interest-only mortgages, but otherwise you will be paying interest on capital already repaid. Always compare costs of monthly repayments rather than just looking for the lowest interest rate. If you're tempted by the relative cheapness of the interest-only route (12.4 million are, according to the Council of Mortgage Lenders), remember you won't own your home after 25 years unless you've come up with a plan to repay the capital sum borrowed.

Your first port of call when remortgaging is your current lender, who might be prepared to offer a better deal to keep your custom. Otherwise consult a mortgage broker. But prepare ahead by a few months if it's a current fixed deal that's ending: unless you've organised a seamless transition you could end up losing money because you've been reverted to the lender's SVR (typically around 6.75%). The process is relatively simple, basically requiring the filling in of a couple of forms. It can be implemented in a few days, but you should probably think in terms of a month's timeframe

29 June 2006 © Moneyextra.com

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