Switching lenders can be expensive

There is precious little partner swapping going on in the mortgage market

There is precious little partner swapping going on in the mortgage market. The majority of borrowers are in no position to break off the relationship with their lender no matter how much they like the look of the competition.

The problem is that the costs of switching lenders in most cases wipe out any potential savings. So what can you do if you've been with your lender for some time and you are at the pricey end of the market? It depends on how badly you want out and the size of the mortgage.

The bigger the mortgage, the bigger the saving when moving to a lower interest rate. The average standard variable rate is around 6.13 per cent at the moment. That means monthly repayments of £652 on a £100,000 mortgage.

Applying the cheapest rate, 5.59 per cent from Bank of Scotland, gives a monthly repayment of £619, or a saving of £33 per month. By the time the borrower has paid all the fees associated with changing lenders he or she is more likely to be out of pocket than better off.

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For some help on doing your own calculations, try out the mastercalc link on www.finance2u.com or the mortgage calculator, under mortgage options, on www.irish mortgage.ie.

Changing your mortgage from one institution to another is the same as taking out an entirely new mortgage. That means legal fees and more legal fees and a new valuation fee.

If you are breaking a fixed rate contract, you could be looking at a penalty of up to six months interest but that applies whether you are taking your business elsewhere or just switching in-house to variable.

Legal fees come in two parts - a conservative estimate would be £250 to £400 for the legal outlay and around £400 for the professional fee. The fee charged by the solicitor for professional services varies from one office to another and should be treated as negotiable but the legal outlay is a list of set costs and depends on how complex that case is.

It includes Land Registry fees, searches and usually some charges from the old lender. The valuation fee should be around £100. The process of remortgaging can take up to six weeks to complete.

It may be possible in some cases to add the legal costs into the new loan amount and still come out with lower repayments over the same term. The bigger the loan, the more scope there is for savings.

IF ANY lenders were to offer to pay legal costs to attract new business, it would make all the difference, according to Ms Sarah Wellband of REA Mortgage Choice.

"Unless a lender is prepared to take on switching costs, the option is not there for most borrowers," Ms Wellband said. The mortgage broker would like to see more people moving around to keep lenders on their toes. REA does not recommend breaking a fixed term contract unless the borrower is paying an exorbitant rate of interest.

Another possible hurdle to remortgaging is the mortgage protection policy. Most people buy this cover from the lender because it's convenient although there are much better deals available elsewhere. Some lenders are less than flexible when it comes to losing business and it may be necessary to take out a new policy with another provider. That's just one more thing to add to the checklist before a borrower can decide whether to stay or go.