How to avoid remortgaging pitfalls

The offer of a new remortgage deal with a lower interest rate may be tempting – but there are a number of pitfalls to be wary of to make sure you get a good deal.


Early repayment charges (ERCs)

Early repayment or redemption charges (ERCs) are used by lenders to keep homeowners with them over the course of a set period.

For short-term fixed-rate mortgages, ERCs usually stand for the length of the initial deal – and are dropped when the mortgage switches to the lender's standard variable rate.

Before remortgaging it is worth checking the small print of your current deal to see when the ERCs stop applying – so you are not hit by a lender's higher standard variable rate (SVR) for too long or the ERCs themselves by switching too early.

On longer-term mortgages – of five, ten or 25 years – the ERCs tend to reduce over the length of the deal.

Those planning debt consolidation loans should also put ERCs into their calculations – if remortgaging to bring together all their debts.

Remortgaging costing more than saving

It is easy to be seduced by the lower rates on a remortgage deal – but it is necessary to factor in all the costs of switching lenders. Sometimes the extra costs can outweigh any potential gains.

Beyond ERCs (above) remortgagers also face legal fees and valuation fees. Usually the new lender will pay these costs – but not all lenders do and not in all situations.

New lender's fees

Fees when you start a mortgage are increasingly common and something to add to calculations when considering whether it makes sense to remortgage or not.

Setting up a new mortgage can leave you facing arrangement fees and reservation fees. Remortgage deals exist without the fees – but often the interest rates are higher.

Other costs include valuation fees – as the mortgage lender assesses the value of the property they are lending against - and legal fees. However many lenders do offer to cover these costs.

Higher lending charges could also be payable if you are borrowing over 90 per cent of the value of the property.

Those opting for a remortgage deal through a broker could face paying their fees – depending on whether the broker charges a fee or receives commission from a lender.


Daily or annual interest

A detail often missed when choosing a new mortgage deal is whether interest is calculated daily or annually.

It may seem like there is little difference between daily and annual interest – but with interest calculated annually it is only after a year of repayments that you benefit from a cut in repayments.

When a mortgage's interest is calculated daily as you repay, the amount owed is reduced and so are the repayments.


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