Cut your mortgage costs by £2,617 by Christmas 2011!

Find out how you can shave thousands of pounds off your mortgage costs by the end of 2011.

At last there has been some great news for mortgage borrowers. The cost of fixed rate deals is finally starting to fall, according to lovemoney.com partner, Moneyfacts.

At the beginning of December, the average two-year fixed rate deal dipped below 5% for the first time in six months. And, after another week or so of rate-chopping, the average has fallen to just 4.86%.

In fact, competition in the fixed rate mortgage market certainly looks to be hotting up at last, with the number of two-year fixes with rates below 4% climbing from 53 to 94 over the last couple of months.

Don't get too comfortable!

This is definitely a good sign, but it isn't a good reason to be any less vigilant when the time comes to remortgage. Here's why...

If you're about to apply for a new mortgage deal and you've managed to build up a healthy 40% equity stake in your home, you might think you're sitting pretty. After all, the very best mortgage deals are available at 60% loan-to-value (LTV).

But even if you're in as strong a position as this, things can still go wrong because there's a very wide margin between the best and worst 60% LTV deals. Choose one of the less competitive lenders and you could find yourself seriously out of pocket.

The table below quickly compares the difference in cost between the market-leading deal and the least competitive available today. The figures are based on a £120,000 25-year mortgage on a home with a purchase price of £200,000 payable over a 25-year term:

Two year fixes: Best versus worst

Source: Moneyfacts.co.uk. Figures are based on a true cost comparison, but exclude valuation and legal fees.

Bear in mind that these figures are based on the true cost of both deals. The true cost ignores the headline rate which is applied to the deal. Instead it takes into account the monthly repayments and fees payable over the term of the deal.

True cost is a much more accurate way of comparing mortgages rather than just looking at the rate. You can find out more about this by reading How I picked my mortgage.

On this basis, you can easily see how much more expensive the deal from Skipton Building Society is compared with the top home loan from ING Direct. If you chose the best, rather than the worst, you could save yourself a total of £2,617 by the end of 2011.

It's a similar story if you need to borrow more than 60% of the value of your home. It's true, you will have to pay a premium for a higher LTV deal. Unfortunately, there's nothing you can do about that. But there's still a great disparity between the best and worst mortgages here too. For example, if you're after a two-year fix at 85% LTV, the rates on offer from a handful of lenders have actually risen above 7%. Considering the base rate is at 0.5%, these loans represent very poor value for money indeed.

Choosing a competitive deal is one way to make a big impact on your household finances in the New Year, so do take extra care when you shop around at the end of your current deal.

Beware of headline rates

Don't forget, if you only look at the advertised rates, rather than the true cost, you could really find yourself in hot water. For example, the lowest two-year rate is available from Alliance & Leicester at just 3.15%. This looks like a really attractive deal on the surface. But dig a little bit deeper and you'll find that the lender charges exorbitant mortgage fees making the deal far less tempting in reality.

A&L charge a product fee of 2% of the advance. That means, if you borrowed £120,000, you would have to pay another £2,400 in fees for the privilege. This increases the true cost of the deal way beyond ING Direct's market-leading mortgage.

Of course, if you only to borrow a relatively small amount, A&L's deal may be more cost-effective, but generally-speaking a percentage fee will set you back more than a flat fee.  

Be mortgage savvy!

So you can see getting the right mortgage can be a bit of a minefield. But don't panic because help is at hand. Check out these two videos: Getting through the mortgage maze and How to...slash the cost of your mortgage payments which will steer you towards the best deal for you. You should also speak to a broker at the lovemoney.com mortgage centre for advice on your own circumstances.

The moral of the story is you must always, always scour the market for the best deals whenever you remortgage. If you simply stick with what your current lender offers you, or you move onto a seemingly good value standard variable rate, you could really be losing out. To stay mortgage savvy, join our Cut your costs and pay off your mortgage early goal. And don't forget you can ask other lovemoney.com borrowers for their top tips via our Q&A tool. Good luck!

Need help choosing your next mortgage? Speak to a broker at the lovemoney.com mortgage centre or use lovemoney.com's innovative new mortgage tool to find the best mortgage for you online

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 4045 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 will revert to the lender's standard variable 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.

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