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Guide to Calculating Re-mortgage Benefits

5) Check the cost of application and other fees

Typically, there is either an application or a completion fee, payable when the new loan comes into force.

This can range between £300 and up to £2,000 on some deals.

The lender will often offer to add them to the total cost of the loan, with repayments spread over its term.

However, for you to do your calculations properly, you should divide them by the number of months that the deal is in force.

So, for example, a £999 fee on a two-year deal is divided by the 24 months it is in force for, giving an additional cost of £41.62 a month.

Other costs that you may be asked to pay include:

• Legal fees, which can range between £99 and £300
• Valuation fees, which also range between £99 and £300

Some lenders will include these charges in the overall package they offer. If they do not, treat them in the same way as the application/completion fee: divide the total cost by the term of the special deal.

6) Add up the total monthly charges of the new loan

This includes the mortgage payments themselves, plus the application/completion, legal and valuation costs.

Compare these charges with your existing loan plus, if necessary, any redemption penalty incurred by switching. If the proposed new costs are lower, it makes sense to switch.

Extra tips

• It can make sense to switch even with a heavy redemption penalty – but only if the terms of the new deal are so favourable that you still benefit, even after taking these charges into account. To work that out, treat the redemption penalty as part of the additional monthly costs, spread over the term of the deal

• A new deal with a high application fee can be worthwhile, especially if you have a very large mortgage. But it becomes progressively poorer value the smaller the size of the loan required, or the fewer years you have towards paying it off in its entirety

As a general rule, by the way, switching becomes increasingly pointless if you only have a few years left or the size of the loan is less than £50,000.

• Do take future variable rates, the ones you will move to after the deal ends, into consideration. Everyone likes to think of themselves as a savvy “rate tart”, moving loans at the end of every deal, but the reality is that most of us will stay put with that lender for months if not years afterwards

Therefore, a superb deal could backfire on you if your future variable rate is significantly higher than what you might pay elsewhere. At the very least, promise yourself that you will look into switching again the minute the new deal ends.

• Some lenders are prepared to be flexible with their existing borrowers. Before you switch, ask your current mortgage provider if it is prepared to offer you a special deal to keep you – without all the charges. They may have an offer that suits – saving you the bother of moving

• If you are tempted by a deal that includes home and/or contents insurance as part of the package, be careful. Surveys suggest that taking out such products from a lender, as opposed to shopping around independently, cost significantly more. A rule of thumb is that it adds about 0.25% to the cost of a loan. On our typical £100,000 mortgage example, this means another £250 a year in extra mortgage costs

Final tips

If you are switching mortgages, this may be the time to consider other home-related financial products you may already have, including life, home and contents insurance. You should be able to shave a few pounds a month off all of them.

More pages

Page 1: Introduction
Page 2: 5) Check the cost of application and other fees

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