The Cost of Remortgaging
Before you decide to remortgage, ensure that you consider the drawbacks and potential costs of doing so. The first cost to consider is the penalty fee charged by your existing lender for leaving your mortgage early. If your existing mortgage has a set period with a promotional interest rate, such as those with fixed rates, capped rates, discounted variable rates and tracker rates, your existing mortgage provider may charge you a penalty 'early repayment fee' if you choose to remortgage. Some lenders charge a percentage early repayment fee of up to five percent: on a £100,000 mortgage, this would be five thousand pounds!
If your lender does charge a percentage fee, it usually begins high, but slowly decreases as you near the end of the agreed period. For example: on a five-year fixed rate deal, the fee would start at five percent in the first year, four percent in the second year, three percent in the third year, and so forth. Essentially, the earlier you leave your existing mortgage, the larger the early repayment fee.
In addition, you may find that your lender charges an 'extended' early repayment fee, which means that although the promotional interest rate no longer applies, the penalty fee would be charged, even if you remortgage after the agreed period ends. If you have a cashback mortgage, the cost of leaving within a certain period can be very high; some lenders will ask you to repay the entire cashback amount if you leave within five years for example.
The second group of costs to consider before deciding to pay off your mortgage early are the charges you must pay to obtain a new deal with your new mortgage provider. These fees are essentially no different to those you paid for securing your old mortgage (see Mortgage Fees), and include:
- Arrangement fee
- Valuation fee
- Legal costs (solicitor's fee)
- Higher lending charge
- Reservation fee
Your lender may allow you to add these fees onto the amount borrowed, but if you do so, you will have to pay interest on them for the entire duration of the mortgage, which naturally increases the overall cost to you.
Arrangement fees have steadily increased over the last few years, but are typically around nine hundred pounds. In some cases, lenders charge a percentage fee, which means that the fee will be greater the larger the mortgage. Some lenders may not charge you a valuation fee, but others will ask you to pay a further few hundred pounds for this. Other lenders may pay the legal fees for you too; if not, you are typically required to pay around five hundred pounds. Reservation fees can be up to six hundred pounds.
If you are moving house as part of your remortgage, a further cost to consider is Stamp Duty Land Tax. This is essentially a fee which the government charges you as a result of the sale, and is a percentage of the property's selling price. For more details see Further Costs.
Ensure you consider the cost of remortgaging, versus the savings you will make, before making a final decision. Naturally, if the cost of remortgaging outweighs the saving, there is little point in switching. You can easily calculate the savings you will make by obtaining estimates that tell you what your new monthly repayment will be, and comparing these to your current repayments.
For example; you take out a new mortgage with a fixed interest rate of five percent for five years: multiplying your new repayment of eight hundred pounds by sixty months equals £48,000. If you do the same calculation with your current repayment of nine hundred pounds a month, this would equal £54,000: the new deal represents a saving of six thousand pounds over the five years.
If you take this six thousand pound saving and deduct the cost of remortgaging, you can determine whether or not a remortgage will save you money.
