FOOL'S EYE VIEW
Cash In On Low Rates

By Stuart Watson (TMFTiger)
November 13, 2001

Great Titchfield Street, London -- There has been a lot of press coverage about the benefits of remortgaging recently. Any why not? Following last week's cut in base rates, mortgage rates are now at their lowest level since 1955. Despite this, many of us are paying hundreds of pounds a year more than we need to on our mortgage. We don't take advantage of lower rates because either we can't be bothered or, even worse, we don't know we can.

If you're reading this article, then I'm guessing that the chances that you don't know you can save lots of money are pretty slim. So let's concentrate on the first problem and look at how to go about the whole process. It is going to take some effort on your part. No one is going to drop several hundred or even several thousand of your pounds into your lap out of pure generosity. Last time I checked, we weren't living in the land of the fairies where such things happen for no reason whatsoever.

But the whole process is a lot easier than it used to be. The market is more competitive, so the potential savings can be significant. And with the advent of the Internet, it's easier to find a good deal and get information on how to make that switch. The first step is to get a rough idea of how much you might save.

How much can you save?

At the moment, you can get a variable or fixed-rate mortgage for around 5%. There are other deals that offer even lower rates, but only for short periods of time. As a general rule, if you're looking for a special deal, it's better to go for one that offers a smaller discount but for a longer period of time. First of all, the total benefits you receive are often larger. Secondly, it won't come as such a shock when your discount rate ends. If your initial rate is too low,  it could be difficult to adjust when the discount ends.

Many people who took out mortgages more than two years ago could be on fixed rates of around 7% to 8%. If you're one of these people, then you should seriously think about remortgaging. Have a look at the calculator in our mortgage centre and plug in a few numbers to see how much you could save each month. For example, you can see that the difference on the monthly repayment for £70,000 at 5% and 8% is £131 -- that's almost £1,600 a year. Do you really need more convincing?

How much will it cost you?

If you have a fixed rate or other special deal on your existing mortgage, then you may have to pay a redemption penalty. Check your mortgage documentation or phone your lender if you're not sure whether your mortgage has one or how much it would be. It could be as much as 6 month's interest. If you have a £70,000 mortgage at 8%, that's £2,800.

There could be other costs as well. There may be an application fee for your new mortgage and there will be legal and valuation fees as well. Assume you will have to pay somewhere between £300 and £500 in this respect, unless you have good reason to think your costs will be higher (or lower).

Add these amounts together and compare them against what you could save. You can then work out how many months it will take before your savings outweigh your costs. The sums can be more complicated if your fixed rate deal expires in the near future or if your redemption penalties 'step down' on an annual basis.

Say you calculate that it will cost you £1,000 to redeem your fixed rate mortgage and that other costs amount to £400. If you work out that you can save £100 a month, then your payback period is 14 months. If your fixed rate deal lasts for another two years then your total savings are £1,000 -- being the remaining ten months at £100 each.

Get moving!

Okay, by now you should have a good idea whether it is worth pursuing the remortgaging route. Now you need to find another mortgage. Check out our homeowning centre for details of how to choose a mortgage that best suits your situation. You can also find best buy tables in weekend newspapers or on financial websites. The very best deals are usually only available for a limited time, or to those who meet a certain criteria. Also, the very best deals often have a sting in the tail, such as a higher variable rate when the offer period expires. Often, you're better off getting something that is good value rather than what appears to be great value. The great value usually turns out to be bait and you don't want to get hooked!

What to do with the extra money?

Well, you could spend it but there are much more useful things that you could do. If you've added the redemption costs and/or fees to your mortgage rather than funding them out of spare cash, then consider using the spare money to pay off that element of your mortgage. In fact, overpaying a mortgage is usually an excellent idea and the latest flexible mortgages make this very easy to do.

If you have other debts then look at using this money to pay them off instead. Or if you're lucky enough to have no other debts, why not use the extra money to invest via a low-cost index tracker? £100 a month can soon build up into a substantial sum.

More: Homeowning centre