Is It Worth Remortgaging?

You can remortgage and get lower rates, but this brings extra costs. The question we have to ask ourselves is: 'Is it worth it?'

Fickle's a great word, although I think I've just gone off it.(I should warn you now, my editor's away so I may throw in a few terrible one-liners like that - just to see him cringe when he gets back!)

But seriously, when it comes to personal finance, fickle is the key word. Financial providers don't reward loyalty, so why should we remain loyal? Any Fool knows that there are always better deals out there.

Standard Life Bank claims that it doesn't pay to be fickle. It has just produced a report which suggests that if you get a mortgage with a low standard variable rate (SVR) and stick with it, you'll probably do better than someone who switches.

The problem is, standard variable rates are never low. Typically, they're around 2% above the Bank of England base rate, which means paying about 6.5% to 6.75% at present. However, you can get introductory deals lasting two or more years for around 4.5%. This may not seem like much of a difference, but if you've got a £100,000 mortgage and you're on the standard variable rate, you'll probably pay about £2,000 more than you need to this year alone!

The trick is to remortgage when your introductory deal expires, and to keep remortgaging in the same way every few years. There are costs involved, but my sums show that it's usually worthwhile. Here's how it works, and how to work out whether you should switch.

Check what you're paying now. Let's say you originally took out a 25-year, £100,000 repayment mortgage. Over the first five years you've paid an average interest of 6.5%, so with 20 years remaining you still owe about £90,600. You pay a little over £675 per month. If you stick with the same provider, you'll pay £16,200 over the next two years.

You look around for better deals. You see (via our mortgage comparison service of course!) that Portman Building Society, for example, is offering a two-year fixed rate of 4.49%. If you switch to Portman on a 20 year mortgage, your monthly payments will be £572, which is under £13,750 over two years. Here's the best bit:

£16,200 - £13,750 = £2,450 saved!

In terms of the interest you're paying, you'll save £2,450. However, there are other costs to consider. You may be charged an exit fee of almost £300. You could then pay a £250 to £500 arrangement fee with your new lender and £200 to £500 in legal fees. Your worst case scenario is probably costs of £1,300, but that still makes the switch attractive, as the net saving is £1,150 in just two years.

I calculate that if you started with a £100,000 repayment mortgage and you now have about ten years left, it's almost certainly worth switching. However, the benefits of continuing to switch dwindle when you reach five years to go, so do your sums before proceeding.

And finally.

Watch out for early redemption penalties! If your current provider will penalise you for switching (I mean, on top of the exit fee they charge) you should build this into your sums. When you switch, make sure you're not going to be charged early redemption penalties after the introductory deal expires. You can see clearly the early redemption penalties - or lack of them - when you compare deals through the Motley Fool's mortgage comparison centre.

Whoops, I forgot the cringeworthy one-liners! Ed did tell me he'd kill me if I ever use the word savvy though, but, whoops again, I just did!

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