FOOL'S EYE VIEW
Finding A Cheaper Mortgage

By Cliff D'Arcy
January 7, 2003

Do you have any idea how much your mortgage interest bill totalled last year?  If you do, give yourself a pat on the back for being exceptionally financially aware. For the majority of people, the monthly mortgage payment is our biggest financial commitment, yet very few of us could confirm the interest rate we're paying and our exact payment.

Fortunately, this is the time of year when most mortgage lenders send out annual statements to their borrowers, so yours may be landing on your doorstep very soon. As this is the season for New Year's resolutions, it's also a great time to weigh up your mortgage against the competition to see if you're getting the best deal. However, be warned: the savings you can make by shopping around may shock you and you may not like what you find!

If your lender is charging you interest at its standard variable rate (SVR) -- in other words, you're not on a fixed, discounted or other special-rate deal -- you can almost certainly make substantial savings by shopping around.

Research just published by financial research company Defaqto shows that there is a massive difference between the monthly repayments charged by the cheapest and most expensive lenders. The report examined 36 of the UK's largest lenders and compared the interest that a borrower would pay on a £50,000 interest-only mortgage (which is a typical debt for an existing borrower).

The report clearly shows that, by and large, many smaller lenders are offering their existing customers a pretty good deal. Conversely, the biggest players, including HBOS (LSE: HBOS), Abbey National (LSE: ANL), Lloyds TSB (LSE: LLOY) and Barclays (LSE: BARC), offer their existing customers some of the worst deals around.

In fact, HSBC (LSE: HSBA) and Nationwide BS were the only major high-street lenders to be included in the ten cheapest lenders.

The cheapest standard rate was charged by the online bank Egg (LSE: EGG), which charged just £2,370 in interest on a £50,000 interest-only mortgage last year (equivalent to a market-beating SVR of 4.74%). Across all 36 lenders reviewed, the average interest bill was £2,828 - £458 more than Egg charged its borrowers.

Abbey National, the UK's second-largest mortgage lender, gets the wooden spoon, being the only major mortgage lender with a mortgage rate over 6% during 2002. Unfortunate Abbey National borrowers would have been almost £56 a month worse off than lucky Egg customers, having paid an extra £666, with a total interest bill of £3,036.

The five cheapest lenders (see the table below) all charged a standard interest rate of 5% or under, whereas twenty lenders – including most of the UK's biggest "household name" lenders - charged 5.75% or more. This means that borrowers switching a £50,000 interest-only mortgage from one of these lenders to any of the top five would cut their annual mortgage bills by at least £365.

So, let's have a round of applause for the five cheapest lenders, which are:

Lender             Interest     SVR
                    on £50k   
Egg                  £2,370    4.74%
HSBC                 £2,375    4.75%
Nationwide BS        £2,420    4.84%
Intelligent Finance  £2,425    4.85%
Standard Life Bank   £2,500    5.00%

On the other hand, if you're paying the standard rate with one of the following ten lenders, you should seriously consider switching your mortgage without delay:

Alliance & Leicester (LSE: AL.), Bank of Ireland (LSE: BKIR), Birmingham Midshires, Bradford & Bingley (LSE: BB.), Bristol & West, Cheltenham & Gloucester, NatWest, Royal Bank of Scotland (LSE: RBS), Woolwich and Yorkshire Bank, which all charge 5.95%.

In previous years, building societies and mutual companies (those without shareholders) usually dominated these annual surveys of the cheapest lenders. Furthermore, these best buys rarely included the standard mortgages of the banks and demutualised building societies (such as Halifax, Abbey National and Woolwich).

However, the table for 2002 is fairly diverse and features four building societies, three direct lenders, two online lenders and a single high-street bank (HSBC). This supports the argument that you should actively shop around to find a better deal.

Summary

Unless your mortgage is with one of the five cheapest lenders mentioned above, you're probably paying over the odds. You should explore re-mortgaging by:

1) Contacting your existing mortgage lender and demanding the best deal – usually what they're offering new customers (this is cheap, easy, convenient and saves you shelling out on switching costs, such as solicitors' fees, valuation charges, etc.)

2) Checking out the Fool's Homeowning Centre.

3) Reading the Fool's new 21st Century Mortgage Guide

Finally, remember to take the best deal, not the first deal!

The writer has a beneficial interest in HBOS.