Are all the fees we pay for switching mortgage worth it?
Our mortgages last decades, yet we continue to focus on short-term deals, paying extra fees every time we switch. These include arrangement fees, booking fees, exit fees, valuation fees, and legal expenses.
Based on some CML data and figures from information specialists Defaqto, the average arrangement and booking fees for a two-year deal total approximately £830. Add on conservative estimates for the other fees and expenses, and you could expect to pay around £15,000 over the life of an average mortgage when starting with a 20% deposit.
You can get mortgages with no fees whatsoever and all expenses paid, but they usually have higher interest rates, so it is swings and roundabouts.
On top of that, some fees are normally added to the mortgage, so you can expect that to add an extra £5,000 in interest based on my estimate of the average interest rates that deal hoppers have achieved over the past three-and-a-half decades. That makes a total extra cost, just for shopping around, of about £20,000.
Shopping around for a new mortgage
All that said, the short-term introductory deals that we leapfrog to and from often come with lower interest rates than mortgage lenders' standard rates, called “standard variable rates”, or SVRs. By my estimates, using Bank of England data and scouring historical archives of mortgage reports, those mortgage borrowers who haven't shopped around have probably paid interest rates around 1.5 percentage points higher, on average.
[SPOTLIGHT]In the past few years this hasn't been the case, but over most of the decades of your mortgage you can probably expect it to return to that sort of difference.
The reduction in interest makes all those fees well worth it. I estimate that you could expect to save between £30,000 and £50,000 in interest payments by shopping around if you reduce the average interest rate you pay by just 1.5 percentage points.
To spell that out to you, you pay an extra £20,000 in fees and associated costs by remortgaging every two years, but you save £30,000 to £50,000 in interest due to getting better deals.
Paying off your mortgage early
You could reduce the cost of fees dramatically, and reduce the interest, if you don't take so long to pay off your mortgage. On average, according to first direct, we take 30 years to clear our mortgage debt. Presumably this is due to extending mortgages to make payments affordable, either in hard times or when making home improvements or upsizing, or so we can continue to pay for luxuries that we've gotten used to.
30 years is pretty normal in some countries, such as in parts of the USA, but if you can live frugally and pay off your mortgage in 20 years, or even ten years, you will be far richer for it. 10- or 20-year mortgages are common in Germany, so it can be done. What's more, a quarter of us here in the UK are on track to pay off our mortgages in just ten years, according to first direct. Doing so will save many tens of thousands extra in interest payments and fees.
Fixing for the long term
If you're not taking advantage of low interest rates to make some serious overpayments – or even in addition to doing that – take a look at ten-year fixed deals. The extra cost of fixing for longer compared to two-year deals is currently small. You can fix for a decade at little more than 4% APR, and you will save on several fees and expenses.
What's more, this is considerably below the average interest rate that we have paid over the past 15 years, and probably less than half the average for the past 35 years, making it a fantastic long-term bet. If you don't think that record low interest rates is the right time for you to get a long-term fix, then no time will be the right time.
With Chelsea Building Society's ten-year fixed deal at less than 4% APR seemingly already sold out, the best ten-year fixes available are Yorkshire Building Society's costing 4.19% with a single £1,000 fee for those with mortgages worth 75% of the value of your property.
Moneyfacts tells me the average two-year fixed deal is 4.22%, so that is an extraordinary bargain. Alternatively Skipton Building Society charges 5.85% with no fee for those with a 15% deposit.
As a second-best option – in my view – consider the seven-year fixes available, some of which are below 4%, such as Chelsea Building Society's at 3.69% to 5.29% APR, depending on your deposit, with a £200 fee.
More: The house price problem that's crippling the market | It's your moral duty to buy property
At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.