Move mortgage, switch supplier - and put pounds in your pocket

FOR most people, buying a property is the biggest financial commitment they will make. Soaring property prices mean the cost of bricks and mortar has never been so high in relation to earnings.

The average salary of full-time workers in the UK stands at around 25,000. Average house prices across Scotland have risen for 18 successive quarters - up 2.6 per cent in the last three months alone and a huge 19.5 per cent in the past year - to almost 130,000. This means property prices here are more than five times average earnings.

On top of these mammoth costs, many homeowners are also paying through the nose with uncompetitive mortgage deals. As many as 30 per cent of UK mortgage borrowers are effectively turning down a 10 per cent pay rise - or 2,400 - by not remortgaging away from their lenders' standard variable rate (SVR).

An average borrower with a 100,000 mortgage who is paying a typical SVR of 6.5 per cent could save 4,440, after allowing for fees, by moving to a competitive two-year fixed-rate of 4.28 per cent. This is equivalent to pre-tax earnings for a basic-rate tax-payer of 4,813 - or 2,407 per year, says mortgage broker John Charcol - equal to a 9.63 per cent pay-rise. "No matter how many times consumers read about the savings they could make, they will still sit on their hands and do nothing. If someone told me I was turning down a 10 per cent pay rise, I'd do something about it," says Drew Wotherspoon, a mortgage broker. He stresses that there is a misconception that remortgaging takes a long time and is riddled with problems: "The process is relatively painless and should not take more than two hours of a borrower's time. Put that another way: you're earning 2,407 an hour."

Those sitting on an SVR can expect to reduce their annual interest rate by at least 2 per cent by remortgaging. Those with a 100,000 mortgage who track down a deal 2 per cent lower will save around 166 per month. With the Portman Building Society's market-leading two-year fixed-rate recently reduced to 4.2 per cent, the monthly saving could climb to almost 200. "There's little reason for anyone to be paying their lender's SVR," says James Cotton, a mortgage specialist at London & Country Mortgages. "Even if you can easily manage your current monthly payments, it's still worth switching. If you move to a lower rate that allows overpayments, you'll start paying off your mortgage early. By paying an extra 100 per month, someone with a 100,000 repayment loan over 25 years could save more than 18,000 in interest and cut their mortgage term by seven years."

So, how do you go about it and what sort of deal should you look for? First, check with you lender if they levy any penalties for early redemption. If you will be hit with charges for switching, do your sums. These costs might erode - or completely eliminate - the potential savings.

Find out if your existing lender will offer you a better rate. Factor in any fees they will charge, then compare the result with the rest of the market.

Product comparison services, such as Moneyfacts, Moneysupermarket and Moneyextra, can be invaluable. Specialist mortgage brokers can also prove useful. They could get you a better deal, but be aware they might charge a fee.

There are hundreds of different mortgages to choose from. Deciding on the type can seem bewildering.

"Looking for a suitable mortgage is no mean feat: there are various elements you must consider before making the leap," says Louise Cuming at moneysupermarket.com. "Determine which elements of a product type hold the most value for you."

Those who have stretched themselves to the limit in borrowing, for example, could be well advised to opt for a fixed rate. These give the peace of mind that your monthly repayments will remain the same.

Homeowners with irregular additional income (such as commission or bonuses) or the self-employed should look for a flexible discounted product that allows overpayment, underpayment and payment holidays. Savings on discounted variable rates have reached their highest in over a year, surpassing two and three-year fixed-rate deals, according to the latest index from estate agency Your Move. A higher-rate taxpayer, though, with a large monthly income and healthy savings might find an offset mortgage - where savings are offset against mortgage interest - the most efficient. Whatever type of loan you go for, beware redemption penalties that extend beyond the offer period. Some lenders offer very low interest rates, but tie you into an uncompetitive SVR for years afterwards.

Also avoid deals that come with a compulsory mortgage indemnity guarantee (MIG). Though it sounds like a favourable feature, it is effectively an insurance policy that the borrower must pay but which benefits the lender. Often charged on loans greater than 90 per cent of the property value, MIG premiums are added on to homeowners' monthly repayments - and protect the lender should you default on the loan.

Pay attention to the true cost of mortgages - the full cost over the full term - not just the headline rate. Think about arrangement and valuation fees, as well as legal costs. These all add up, but there is a plethora of products that cover some, if not all, associated costs.

REMORTGAGING TIPS

REMORTGAGING can put pounds in your pocket. Here are some tips to help you make big savings:

Are you tied into your current loan? Early redemption penalties could eat into or wipe out the possible savings, so check this out.

Check if your lender will offer a better rate: the mortgage market is highly competitive and they might have a deal you can't refuse.

Consider which type of product - fixed, discounted, capped, tracker or offset - best suits your needs.

Search the entire market. Impartial online comparison services and mortgage brokers can help you hunt down the best mortgage.

Be aware of the elements that lenders factor in before they approve an application. You might be limited by the amount you want to borrow - some lenders might consider a 30,000 loan too little and a 2 million one too large. If you are increasing borrowings, they will want to know what the extra money is for and check your credit history.

Compare the true cost of products, and add arrangement costs, legal charges and valuation fees. Look for products that offer these free.

Beware loans that come with penalties that go beyond the offer period. This will tie you into an uncompetitive product.

Avoid mortgages that make you take out mortgage indemnity guarantee. You pay - but it benefits the lender.

Capitalising on the house-price boom for a brighter financial future

CASE STUDY

REMORTGAGING is proving one of the best financial decisions Glen Gemmell ever made. The 42-year-old, who lives in Auchinleck in Ayrshire with wife Mary, 41, is in the process of remortgaging from a Direct Line five-year fixed rate of 5.79 per cent on to Abbey's 4.69 per cent two-year fix.

Being four years into his current deal, there were redemption penalties. But, after some number-crunching by mortgage broker Purely Mortgages, Gemmell, who builds fire engines in Cummnock for a living, realised the move would still be profitable. "I knew about remortgaging, but I'd never looked into it," he says. I hadn't realised that just a slight improvement in the interest rate could make such a big difference."

The father of two sons - 24-year-old Gordon and Darren, 20 - will see his monthly mortgage repayments fall by around 60 a month, equating to a saving of 720 per year. On top of that, the housing boom has allowed him to release some of the equity from his home to secure a brighter financial future for his family. Their property is now worth 160,000. Remortgaging on to a 120,000 loan will yield capital to buy Gemmell's mother-in-law's council house and pay off a personal loan, on which he had been paying an annual interest rate of 7.9 per cent. "We were able to raise some money because the value of the house had risen by a fair bit. We'll be paying less in mortgage repayments, have less debt and another property to our name.

"Remortgaging will help us secure a better future financially: what more can you ask for?"

CONTACTS

John Charcol 0800 718191/ www.johncharcol.co.uk

Portman Building Society 0845 8457000 www.portman.co.uk

London & Country Mortgages 0800 9530304 www.lcplc.co.uk

Purely Mortgages 0800 4220033 www.purely.co.uk

uSwitch 0800 0930607 www.uswitch.com

UK Power 0800 0932447 www.ukpower.co.uk

OneTel 0845 8188000 www.onetel.co.uk

Switching made easy

WANT to change gas or electricity supplier? Follow our quick five-point guide:

Find out how much energy you use in a year by getting your last four quarterly bills and totalling the kilowatt (kWh) figures.

Decide how you want to pay. Paying by monthly direct debit will usually save more, as will a switch to an internet tariff - manage your account online and you'll get a discount for no longer receiving paper bills.

Go to a price comparison service (The Energy Shop, uSwitch, UK Power) to search the market. You can apply online to make the switch through these sites.

The switch should be complete in four to six weeks. Keep a note of meter readings: they will be used to calculate the final bill with your old supplier and first bill with your new firm.

Cancel any direct debits with the old supplier.

Enjoy the savings.