FOOL'S EYE VIEW
How To Be A Rate Tart

By Jane Mack (TMFJane)
August 6, 2002

If there's been one good thing about the latest stock market woes, it's been that the Bank of England hasn't put the base rate up. The reason that's good? Well, it means that those of us with mortgages don't have to worry about a hike in our monthly payments anytime soon.

You could do even better though. Low interest rates generally translate into lower mortgage rates but it's amazing how many people don't take advantage of this by switching to a better deal. I suspect people think it's too much effort and yet remortgaging can save you thousands over the long-term. I hope to goodness it isn't down to misguided loyalty because lenders feel very little loyalty for their customers. In fact, people who regularly change their mortgage lender in search of better deals are known in the industry as rate tarts!

Well, they can call me a tart as much as they like but what matters is what's best for my bank balance, not theirs, and you should think the same.

Deciding whether to remortgage your home comes down to a basic calculation: Will your savings from reduced mortgage payments be greater than the up-front costs?

For a start there are likely to be legal fees. These can vary enormously but, as a rough guide, you can expect to pay between £300 and £500. Your new lender may also charge an arrangement fee for setting up the mortgage and you can bet your bottom dollar they'll want a survey done on your home too. Arrangement fees can cost around £250 and surveys anything from £200 to £500.

Aside from these general costs you may also have redemption penalties to take into account. These could be sizeable and may well offset the savings you gain by refinancing in the first place. For example, a five year fixed-rate mortgage may require you to borrow for a further two years at the lender's standard variable rate before you are free to move without penalty. If you move sooner it could cost you as much as six months interest.

Nevertheless, the savings could still be substantial. For example, if you took out a fixed rate mortgage two or three years ago, you could be paying in the region of 7%. The base rate is now 4% and average mortgage rates are roughly 5%, not to mention the even cheaper special deals that are around at the moment.

Use the calculator in our Homeowning Centre to check out the numbers. For example, a rate of 7% on a repayment mortgage of £80,000 would cost you £565 a month. A rate of 5% would cut that by £98 a month – that's nearly £1,200 a year! Even taking into account the costs of switching lenders you could still be saving money within the year.

One trick I'd highly recommend because it's worked twice for me, is to threaten to leave your current lender. Three years ago I phoned my lender and said I was thinking about remortgaging elsewhere and could they offer me a better deal if I stayed? I got a two-year discount and even managed to get the arrangement fee halved by pointing out that it was a bit of a cheek charging me to stay with them! When the time was up I rang again and gave them exactly the same line and now have a discount for ten years which is 0.95% below their standard variable rate. I could probably do slightly better elsewhere but as I've saved myself all those fees by not actually switching every two or three years, it's worked out quite well for me.

If you're happy with your current deal and can't really improve on it, then your best bet would be to make overpayments if you're allowed to. Again, this is something I've recently started doing. With interest rates are so low at the moment it would be silly not to take advantage and it'll mean you'll get to own your home sooner than you thought as well as saving a ton of money in interest.

At the very least, sit down with a nice cuppa and do some numbers. You never know, you might be able to afford that holiday in Barbados next year.

More: Homeowning Centre