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If you are serious about getting your finances on an even keel this year, one of your first priorities should be to see whether you are paying too much for your mortgage.
Over the last few weeks Cash has told you how to compile a budget, cut spending on utility bills and prioritise the types of life and protection insurance you may need. For homeowners, a review of mortgage costs should be next. Millions of us are paying hundreds, if not thousands, of pounds too much every year.
'Anyone who is paying their lender's standard variable rate is paying over the odds, and many people with special rate offers could save money by switching,' says David Hollingworth, of Bath independent mortgage brokerLondon & Country.
Most lenders, including Halifax and Abbey National, are charging a standard variable rate (SVR) of 7.74 per cent now. But it's possible to find loans with interest fixed as low as 5.49 per cent for two years, or discounted by 3 per cent, 2 per cent and 1 per cent in successive years.
A homeowner with a £100,000 standard variable rate interest-only mortgage could save £2,250 a year by switching to the fixed rate, and £3,000, £2,000 and £1,000 (assuming the SVR remains the same) by taking the discounted loan.
Compared with the agony of taking out a mortgage when buying a new home, remortgaging is relatively simple and painless. There's no need to pay stamp duty, and lenders are so keen to get your custom that in many cases they will pay your legal costs and valuation fees. If you remortgage with your existing lender, you don't even need the valuation or conveyancying. A lawyer (usually provided by the new lender) simply needs to register the change of lender with the Land Registry.
The whole business can easily be completed in six weeks - and even if it takes a while longer, there's no need to worry. You are not in a race to beat other buyers, and a delay won't cost you the home of your dreams.
Some lenders are encouraging their existing customers to remortgage. It is cheaper for them to retain borrowers, even on lower interest rates, than to pull in new customers.
However, it might not be that much cheaper for you. The Halifax is contacting all customers paying its standard variable rate to see if they are interested in switching to another deal. This offer is good value for borrowers locked into the Halifax by early redemption penalties, as the lender is allowing them to sit out their remaining redemption period while benefiting from a lower interest rate. But Ray Boulger of London independent mortgage broker Charcol says those who are not subject to penalties can undoubtedly find better rates with other lenders. 'As with all financial products, it's important to shop around,' he says.
So how do you work out if a fresh deal will save you money?
First, find out what interest rate you are paying and whether you face redemption penalties if you remortgage. These charges are either presented as a percentage of the loan, or as a number of months' interest. The easy way to discover the cost is to ask your lender for a redemption statement, which should set out any penalties.
You then need to compare the penalties to any savings you would make over a comparable period. For example, someone whose special rate deal has expired and is now paying the lender's SVR of 7.74 per cent would pay £15,480 in interest if rates stay at current levels (7.74 per cent multiplied by £100,000 multiplied by two years). Let's say this borrower faces redemption penalties of 5 per cent or £5,000 for a further two years. If he is considering switching to the 5.49 per cent fixed-rate mortgage mentioned above, he would have to pay £10,980 in interest over the next two years (5.49 per cent multiplied by £100,000 multiplied by two years). To this you must add the £5,000 in penalties, bringing the total cost to £15,980 - £500 more than he would pay on the SVR.
It's important to include all costs in this calculation. If the new lender makes an administration charge - usually in the region of £300 - or does not offer to cover the cost of a valuation (about £200) or legal fees (expect to pay £300), the borrower could end up further out of pocket by remortgaging.
Once you've found a mortgage that will save you a worthwhile amount of money, you can help smooth the process by assembling any necessary information as soon as possible. This will include a P60 certificate of pay and tax deducted, recent payslips, your last mortgage statement and sometimes an employer's reference.
Happy saving ?1,800
Phil and Tracey Harding will save more than ?1,800 over the next two years by remortgaging.
The Hampshire couple borrowed a discounted tracker loan from the Newcastle building society, but the discount was ending, leaving them to pay 0.75 per cent above the Bank of England base rate - currently 6.75 per cent. The monthly repayments on their ?74,000 interest-only loan would have been ?416.25 (6.75 per cent multiplied by ?74,000 divided by 12 months).
Phil, who works as a development technician for McLaren sports cars, says: 'I wasn't prepared to pay that. I've got a young family so I've got to watch where the money goes.'
His existing mortgage had no early redemption penalties, so with the help of London & Country Mortgages, Phil chose a Coventry building society loan discounted by 2.2 per cent from the lender's standard variable rate (now 7.7 per cent) for two years. This will cost ?339 a month (5.5 per cent multiplied by ?74,000 divided by 12 months). The offer included a free valuation, free basic legal work and, again, no redemption penalties, so the Hardings can again remortgage at the end of the discounted period if it saves them money. Coventry charged a completion fee of ?195, which was added on to the loan.
The whole process was simple and stress free. 'A colleague gave me London & Country's number, I gave them our details and they did the rest. It's taken about three months, but it would have been quicker but for a delay by the solicitors [provided by Coventry BS].'
Flexing their borrowing muscle
Remortgaging has allowed Peter and Mary
Devlin to pay off an overdraft and a car loan, and
buy income replacement cover. And because they
chose a flexible mortgage, they expect to pay off
the extra raised to pay off the debts in two years.
They had a ?121,000 interest-only loan from Bank
of Ireland, benefiting from a couple of special
rate offers. But their last discount expired, leaving
them on BoI's standard variable rate of 7.75 per
cent. Their monthly payments were ?781, plus ?65
for associated policies.
'I thought we were paying too much, and there
was no flexibility,' says Peter. Remortgaging
made sense as the couple, who have three
children, had built up debts costing ?330 a month.
Peter, who is approaching age 44, also wanted an
income replacement policy.
On the advice of mortgage broker Charcol, the
couple switched to the Woolwich Open Plan, a
flexible mortgage that allows you to repay chunks
of your mortgage early, overpay your monthly
premiums, and draw out money you have paid
into your mortgage account. The Devlins
increased the loan to ?138,000 to incorporate their
debts, leaving ?121,000 on an interest-only basis
and setting up the extra ?17,000 as a repayment
loan. But as the loan was discounted by 2 per
cent for two years, their monthly outgoings of
?689 plus ?138 for life insurance were about the
same as their previous mortgage - without the
cost of the debts.
A wide range of flexible loans allow you to repay
early without penalty (see table on page 2); some
also allow you to draw out money and take
payment holidays. Whichever you choose, check
that it calculates interest daily. Interest on many
Halifax flexible loans is adjusted annually, and
borrowers will benefit immediately only from
overpayments in excess of ?250.
A few lenders - again Woolwich, Virgin and
Intelligent Finance - take flexibility a step further
by incorporating current and savings accounts,
credit cards and personal loans. Any income is
offset against borrowings on a daily basis,
effectively reducing the amount a borrower owes,
and hence the interest they pay.
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