The cost of staying put

Eight million homeowners are potentially wasting over £8bn between them by failing to switch to cheaper mortgages, according to new research from independent mortgage broker Charcol.

Despite cut-throat competition in the mortgage market which offers many homeowners the chance to reduce their monthly mortage payments by switching to lower-rate deals, Charcol's survey reveals that three in four borrowers have never remortgaged. And, of those who have, only 4% have done so more than once.

"It's surprising that there are so many borrowers who haven't understood the savings potential of remortgag ing, particularly now in such a challenging market, when deposit savings rates and stock markets are so subdued," says Charcol general manager Ricky Okey. "Low mortgage rates is one of the good news financial stories and borrowers need to maximise the benefit where they can."

Mortgage borrowers, particularly the estimated 30%-35% who are currently paying lenders' standard variable rates (SVR), can potentially save thousands of pounds over relatively short periods by switching to lower-rate fixed, discounted and tracker deals.

If all borrowers made maximum use of remortgage savings opportunities, Charcol calculates they could save a total of £8.4bn.

Charcol gives the example of the potential savings that borrowers currently paying the Halifax's SVR of 5.75% could make by remortgaging on to a market-leading, two-year tracker rate - a Woolwich deal exclusive to the Bradford & Bingley group currently charging 3.99%.

By making this switch, a borrower with an £80,000 interest-only loan over 25 years would cut their monthly payment from £383 to £266, thus saving £117 a month and, potentially, £2,808 over the two year period of the deal if bank base rate, to which the tracker deal is linked, remained the same throughout the term.

On the same basis, the savings for someone with a £100,000 interest-only loan could be £146 a month and £3,504 over the two-year deal, while a borrower with £150,000 loan could potentially save £220 and £5,280 respectively.

These figures don't take into account the lender fee of £99 and broker's booking fee of £49 that borrowers would have to pay for this deal and the potential savings assume that the deal is otherwise fees-free - the Woolwich tracker mortgage comes with free valuation and legal fees.

Charcol's research suggested that the most popular motivation to remortgage is still to save money rather than increase debt. Half of those asked said they would remortgage in order to reduce their monthly payments, while only 24% said they would do so to increase their debt in order to pay for home improvements or consolidation of other, more expensive debt.

Mr Okey says: "Remortgaging should be an integral part of people's financial planning and you should at least be reviewing your mortgage every year. By remaining vigilant and alert to your options you can take advantage of lower deals and either save yourself money or reduce the term of your mortgage."

There's good news for people who remortgage, he continued - the money market rates on which lenders price their fixed rate mortgages came down over the Christmas period. The decline in the cost of borrowing by the banks should result in cheaper fixed-rate deals being offered in the coming months.

But remortgaging will not suit everyone. Anyone locked into an existing deal that imposes hefty penalties for early redemption, for example, may well find that the costs outweigh the potential savings.

Similarly, those with a small outstanding mortgage, particularly repayment loans which are nearing the end of their mortgage term, may find that the savings produced by a 1%-2% drop in the rate are smaller than the costs. In this case moving to a lender with a low standard variable rate would be best.

If you are thinking of remortgaging, you need to do your sums and balance the potential savings against the costs involved. First check with your existing lender whether you'll incur any penalties by redeeming your existing mortgage.

Then add on any arrangement fee charged by your new lender - typically £295 on the most competitive fixed-rate deals - and any fee charged by the mortgage broker. Unless your deal includes a free valuation and free legal fees, you should reckon to spend an average of £270 on your valuation (depending on your property's value) and at least £300 on solicitor fees.

Many lenders will require new local searches on a remortgage, typically adding another £125 to your bill, and there'll be a land registry fee to pay of £40 on properties up to £100,000, £50 on those worth £100,000-£200,000 and £90 on £200,000-£500,000.

There will also typically be a £50-£60 charge for transferring funds electronically from your new lender to your solicitor and then on to your old lender.

Most lenders charge a one-off mortgage indemnity guarantee (MIG) - sometimes called a high loan-to-value (LTV) fee - if you are borrowing over 90% of your property's value. The MIG will typically be 1.7% of your mortgage advance if you are borrowing 95% LTV and 3% on 100% LTV. On a £100,000 mortgage that's £1,700 and £3,000 respectively. If you own a very small equity stake in your property, the MIG cost might well make it not worth remortgaging. Your new lender might also charge you an administration fee of around £25 if you organise your own buildings insurance.

A final cost to include in your calculations are the little-known "exit" charges levied by lenders whenever a morgage is redeemed.

"Over the past few years we have seen many lenders increase the fees they charge when borrowers leave,"says David Bitner, mortgage director at independent financial adviser The Marketplace.

"These exit costs are given many fancy names such as: administration, deeds release, sealing or discharge fees. But they all amount to a sum that you must pay on leaving." Some of the highest exit fees include £125 at the Halifax, £145 at Bank of Ireland, £150 at Alliance & Leicester, Bank of Scotland, Bristol & West and Standard Life, £160 at Northern Rock, and £175 by Intelligent Finance.

· Charcol has published a remortgage guide and is offering borrowers, unsure about the possible benefits of remortgaging an obligation-free review. For details of both, call Charcol on 0800 71 81 91.

Four out of ten borrowers choose a fixed rate deal

Fixed-rate mortgages have swung back into popularity and currently account for almost four in 10 new home loans, according to industry figures published this week.

This may reflect a growing belief among many borrowers that the next move in interest rates will be up, says the Council of Mortgage Lenders.

For those on a tight budget such as many first-time buyers, a fixed-rate mortgage offers the certainty of a static monthly payment. There are plenty of decent deals around - this week, high street IFA The MarketPlace at Bradford & Bingley launched what it claims is a market-leading three-year fixed deal with a rate of 4.49%.

The deal is funded by Bristol & West, has no arrangement fee (there may be other fees) and no early repayment penalties after the fixed period, and comes with £300 cashback and a free valuation. Minimum deposit is 5%. For those looking to fix for a long time, Norwich & Peterborough building society is cutting the rate on its 10-year fixed-rate deal from 5.14% to 4.98%. Minimum deposit is 10%, there are penalties for 10 years but not afterwards, and there is a £325 reservation fee.

If you believe interest rates will stay low and could even have further to fall, you may be interested in the new offset base rate tracker mortgage from Newcastle building society, which claims it is the best buy deal of its type on the market. The current pay rate is 3.9% for six months, then 4.5% (base rate plus 0.5%) for the remainder of the term, and the loan has no early repayment penalties.

The mortgage, available now via www.newcastle.co.uk, allows you to offset your savings against mortgage borrowings.