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Guide to Calculating Re-mortgage Benefits

Introduction

Mortgage lending, like much of the financial services industry, operates on the basis of a paradox. On the one hand, lenders know that retaining an existing borrower is far more profitable, and therefore sensible, than trying to poach new customers.

On the other hand, they are locked into a perennial battle with each other to boost their existing mortgage books by attracting more borrowers, often through poaching them from other lenders.

This helps to explain the vast numbers of attractive new deals out there for re-mortgage customers – and why, in turn, they pay far less attention to existing borrowers.

If you are already with a lender, it always makes sense to look at new deals coming on to the market.

But what factors should you take into account? The key point, as you will see below, is that the benefits of a new deal – i.e. the amount you save from switching – will mainly apply only over the initial term. Thereafter, you will be back on the new lender’s variable rate.

So don’t be tempted to “bury” all additional switching costs over the full term of the mortgage. In all examples below, what we are doing is looking at a typical two-year deal and all examples on costs are related to this.

Here are the practical steps to help you do the sums:

1) Check out the monthly cost of your existing mortgage

You need to know this amount, as it will provide you with the starting point for all your calculations.

2) Check whether your mortgage has any redemption penalties or “overhangs”

Most mortgage deals start with an introductory offer. They then move on to the lender’s existing variable rate.

During the introductory offer – and sometimes for a period thereafter – there are almost always penalties for switching. This is usually expressed in terms of how many months’ interest you will have to pay for closing the mortgage.

Generally, though not always, the penalty relates only to the interest on the mortgage. In other words, if you have a repayment deal, the penalty will only apply to the interest you pay every month.

So go back to the monthly cost, above, and look at the statements to see how much interest you are paying and how much the capital repayment element is.

If you are in the initial stages of a mortgage, although monthly payments are equal throughout the term of the loan (subject to upwards or downwards pressure on rates) the interest will form a large proportion of the entire monthly payments. Over time, as you reduce the capital sum owed, this proportion reduces.

For example, you may have a £100,000 mortgage, on a variable rate of 7%, spread over 25 years. The total monthly payment will be about £706, which includes both capital and interest. Of that, the interest element is £583 in the initial stages.

Therefore, if you have a three-month interest penalty, the price you would pay for leaving the existing mortgage would be £1,749. If the new deal lasts 24 months, this cost is £72.87 a month.

3) Check the mortgage account closing charges

All lenders charge a fee for closing your mortgage. This fee relates to transferring the deeds into your name or over to another lender – basic admin work, in other words.

About 15 years ago, these fees stood at about £100 or less. In recent years, this mysteriously rose to £300 or more in some cases. Lenders were able to do this because in most contracts the fee was described as “variable”.

However, following a recent intervention by the Financial Services Authority – the City watchdog – lenders are no longer allowed to hike them up in this way and will have to stick to the original price quoted.

Typically, you might expect to pay about £150. Divide this cost by the number of months that the new deal applies for, as this gives you the new base line that you are comparing old and new against.

So, a closing charge of £150, spread over 24 months of the new deal, is £6.25 a month.

4) Check out the monthly payments on the new mortgage

By definition, for you to benefit from moving, these costs need to be substantially lower than what you are paying already, certainly for the duration of the deal.

More pages

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

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