FOOL'S EYE VIEW
Remortgage Dilemma -- Or Not

By Jane Mack (TMFJane)
October 8, 2001

In the post this morning I received the joyous news that the two-year discount period for my mortgage is over. I've reverted to the bank's Standard Variable Rate (SVR) – currently at 6.23%.

About half the country's borrowers are on a SVR – mainly because people usually only think about remortgaging when they actually move house. And yet many of them are losing thousands of pounds a year by not getting themselves a better deal – even though it might only entail a quick phone call to their lender.

Anyway, seeing as the bank base rate fell to 4.5% last week – the lowest for 37 years - it seems to me that I can probably get a much better rate than 6.23%. Lower interest rates generally translate into lower mortgage rates, after all. So I gave my current lender a call to see what they could offer me.

Goodness! Mortgages seem to be even more complicated than they were when I was re-financing my home two years ago. No wonder people can't be bothered to remortgage when they get the following sort of information thrown at them:

I can either have a straight 0.95% above base rate for 10 years – no arrangement fee and no lock-in period. Or I can have a two-year discount deal of 2.2% in the first year and then 1% in the second year although I'll have to pay an arrangement fee of £250. Or else I can have a straightforward two-year fixed rate of 5.35% - if I pay the arrangement fee of £250, of course. And that's just for a flexible mortgage!

It all seems terribly confusing but deciding whether to remortgage comes down to a basic calculation: Will my savings from reduced mortgage payments be greater than the up-front costs? So, let me think aloud for a moment...

Assuming I'm looking to sort myself out for the next couple of years, the advantage of the first deal is that my mortgage rate would be 5.45%, I can walk away from it any time I choose and it wouldn't cost me anything to switch to it. If interest rates stay the same, I would save myself £325 over the next two years.

The advantage of the second deal is that I get a good discount in the first year and would save a total of £429 over the two-year period. Unfortunately, the £250 arrangement fee slashes that saving to £179.

The fixed rate of 5.35% for the third possibility would mean a saving of £360 but, again, there's the arrangement fee to pay. I'd only save £110.

I will, of course, have a look around to see if I can get do better by moving to another bank or building society but, unless they're going to pay the ensuing legal and valuation fees for me, I doubt I'm going to be better off by switching lenders. I've got a pretty small mortgage anyway which is why any savings I might make are in the hundreds of pounds rather than thousands. But if you've got a sizeable mortgage and you're on your lender's variable rate, it might make sense to re-negotiate – even if it means the hassle of changing to a different bank or building society. You may have redemption penalties to consider, of course, but it's got to be worth picking up the phone to check out your options.

Anyway, it's pretty obvious which deal I should go for, isn't it? Excuse me – I've got a call to make.

For more information on remortgaging, have a look in our Homeowning Centre.