UK Personal Finance

It used to be a known fact that remortgaging would save you money. However, due to the huge rise in arrangement fees is this still the case? The answer is of course that it depends. You definitely will still be able to save money by switching to a mortgage deal with a better rate, the expensive part is how you go about doing it. You need to shop around to find a better mortgage package as your current lender could offer you a better deal, saving you money in the long run as you will not need to involve a solicitor. You need to think carefully about how you plan to remortgage as in the long run it could save you thousands of pounds. It has been estimated that around half of all borrowers are stuck on a Standard Variable rate (SVR) or other expensive mortgage rates.

Example of short term and long term switch

Short Term: A fixed- rate mortgage rate recently came to an end for Mr and Mrs Clark, this means that they are now paying their lenders full SVR of 7.5%. So, the Clark’s decide to remortgage, they agree to change to another fixed rate but they do not want to fix for a long period of time in case the interest rates fall. The Clark’s choose to fix for two years at 5.05%.

The new package allows the Clarks to borrow £100,000 at 5.05%, which is fixed for two years. The arrangement fee on the remortgage is £999, the lenders valuation is £750 and the solicitors will cost £500. That comes to a total of £2,249 in fees. The Clarks feel they don’t want to pay that, so they add the arrangement fee (£1,749) to the new loan amount and they pay the solicitors fee from their savings.

The Clark’s new mortgage, in total, is £101, 749 at 5.05% which is fixed for two years. This will cost them £428 a month or £5,138 a year. The Clarks old mortgage was a £100,000 loan at 7.5% this was costing them £625 a month or £7,500 a year. The remortgage is therefore saving the Clarks a total of £197 a month, which is £2,362 a year or £4,723, after the solicitors fee, over the fixed two year agreement.

After the two year fixed rate is up, the Clarks will again be subject to paying the lenders Standard Variable rate (SVR), to avoid large monthly repayments they will have to remortgage again. Let’s presume the rates are the same as now and that the Clarks choose a fixed rate deal for five years on another interest only mortgage. The Clarks will now be borrowing £103,498 at 5.10% fixed for five years, the arrangement and valuation fees are the same as before and will be added to the loans total. The Clark’s will be paying £440 a month (£5,278 per year) with there new mortgage instead of £636 a month (£7,631 per year) if they stated on the SVR. In total Mr and Mrs Clark will be saving £196 a month, £2,353 a year and £11,764, after solicitors fees, over the five year fixed rate.

You can see from the examples above that money can be saved by remortgaging, even with the large arrangement fees. This may cause arrangement fees to rise in the future or could lead to other possible admin fees stepping into the remortgage process, to reduce the benefits.

At the moment though remortgaging is worthwhile for those paying a Standard Variable Rate. Remember to plan out your finances before making a definite decision and look around to find the best deal.