Should you switch mortgages?

In recent years the remortgaging market has boomed, as increasing numbers of people have become aware of the advantages of moving their home loan to a new lender.

According to figures produced by Direct Line, the average borrower could save at least ?200 a year by moving their mortgage. But not every borrower falls into that category. There's little point in remortgaging if you don't need to. But if you're not sure, now is the time to find out.

Why remortgage?

There are three main reasons to remortgage: to cut your monthly repayments; to release equity you have built up in the property; or to fix your rate.

The first is straightforward. If your special offer period has ended and you are now paying a lender's standard variable rate (SVR) you could probably get a lower rate elsewhere. In fact, you have probably seen your lender offering a better rate to new borrowers. By moving to a lower rate you will cut your monthly repayments.

Take, for example, an ?80,000 repayment mortgage. If the lender's SVR is 5.75%, your mortgage repayment is ?508.80 a month. By switching to a deal with a pay rate of 4.25% you can cut your repayment to ?438.40 - a difference of ?70.40 each month.

Another reason to remortgage might be to release value that has built up in your property, perhaps as a result of rising house prices. In this instance you would take a new mortgage for the value of the property, not just the amount you owe your existing lender.

This can be a good option for people who want to obtain a large amount of cash with interest charged at the mortgage rate. However, most borrowers would be better off taking out an unsecured personal loan. The interest rate may be higher but the term will be shorter, which means it will cost less in the long run.

The third reason to remortgage is to fix the rate you are paying on your loan. Coventry building society's John King explains: "While interest rates may still fall, it seems more likely they will stay where they are and they may even begin to rise. The deals that are about at the moment are likely to be as good as you will get for a while."

If you have moved onto the lender's SVR after a fixed or discount period, now might be a good time to find a cheap fix and guarantee that the level of your payments won't rise.

"If you want to cut costs but are prepared to take a risk on what might happen in the next couple of years, the best thing to do is take a short-term deal with no overhanging penalties," says Mr King. "If you're on a tight budget, you are better off fixing for as long as possible. The rate might be slightly higher but in 18 months, two years time it might look like a good deal."

Among the good long-term fixes on offer at the moment is a deal from Newcastle Building Society. Interest on the loan is fixed at 5.75% until April 2012.

How to remortgage

If any of these scenarios sound familiar the next step is to work out how much it will cost to remortgage - and whether it is still worthwhile. Look at your current deal to find out if there are any redemption penalties. Also find out from your lender if you are in a negative equity position. In the unlikely event that you are, you should think twice about moving your loan because you will have to find this money before you can move.

The next thing to bear in mind is the cost of the new mortgage: alongside a possible arrangement fee for the loan, there may be legal fees to meet, the price of a new valuation and the cost of local authority searches. It all depends on your lender. "It can cost anything from nothing to ?5,000 to remortgage," says Mr King.

You may choose a deal without an arrangement fee, which will save you upwards of ?200. If you have had a valuation done recently the new lender may be willing to accept its findings. Or you may find a lender willing to pick up the tab for the conveyancing and the survey.

If your own number crunching has only served to confuse you could use the remortgage service on offer with broker Charcol. It will look at your current mortgage arrangements and work out how much you can save. Call Charcol on 0800 71 81 91 for further details of the free service.

The paperwork

Applying for the new deal is simple. You just fill in the forms and provide the paperwork that you did for the original mortgage. Engage a solicitor and arrange a time for the valuation to take place. If everything is in order it should take around five weeks to switch loans.

But before you start the application process, take a few minutes to speak to your current lender. Remortgaging may be simple but it would be even easier if your current lender was willing to offer you a new mortgage at a better deal that your current one. If you are still tied-in this is unlikely, but if you are free to move to a new lender, you are usually free to move to a new loan from your current one.

· Hilary Osborne is editor of What Mortgage