When your introductory mortgage deal ends you usually find that you are moved onto a much higher interest rate - the Standard Variable Rate (SVR).
It hasn't quite worked out that way in recent years, because many mortgage lenders failed to prepare their standard small print for rock-bottom interest rates. As a result, some people have been paying less on their SVRs than those who shop around and get deals. Most unusual indeed.
But this isn't true for everyone and, in most of the many years it takes you to pay off your mortgage debt, it makes sense to be sure you're in a deal of some kind. If you stick with your SVR for the length of the mortgage, you could quite easily pay an extra £35,000 to £50,000 in interest over the length of your mortgage.
Provided you shop around to avoid these expensive mortgages, it sure looks like a no-brainer to remortgage.
However, there are a few costs to consider.
The many costs of remortgaging
Each time you remortgage to get a lower interest rate, you usually need to pay several fees to do so. Lenders don't use the same names for all these fees, which adds to the confusion.
A typical arrangement fee is about £1,000, although it varies considerably. On top of that, you usually pay a booking fee. Some lenders lump this in with the arrangement fee or refund it on completion. It might be £200.
You also normally have to pay legal costs. These could be about £300. Plus, each time you remortgage you might have to pay a new valuation fee, and this could be £300 too, although it depends on the property.
You can also expect to be hit with an exit fee from the mortgage you're leaving. This could be £100 or more.
In total, over the life of the mortgage you might pay £10,000 to £25,000 in remortgaging fees and related expenses, although I haven't even included the cost of using a fee-charging broker or any higher-lending charges (which is sometimes charged to people who need large mortgages in comparison to the property price).
Interest on top of arrangement fees
The arrangement fee is also usually added to the mortgage, so that you don't have to pay it up front. That sounds good, but it is actually my £3,000 hidden cost: you will be charged interest every day on each remortgaging fee, and the effects will last until the end of your mortgage.
You can expect to pay £2,000 to £4,000 in interest on this fee as a result of your wheeling-and-dealing remortgaging over the years, although naturally the size and length of your mortgage will affect that.
£3,000 may seem trivial in comparison to the thousands you spend on remortgaging, and the hundreds of thousands you'll spend on the property overall, but that obscures the fact that it is a lot of money.
To put it into context, that fee interest could cover the cost of your buildings insurance every year that you're in a remortgage deal. If that still doesn't sound like much, imagine that you didn't have that fee interest added on, but imagine instead every few years Tesco sent you an extra £300-£400 bill for all the admin they must do for your shopping and Tesco Clubcard account. It'll add up to a similar amount over the same period, so the question is not “What is the cost attached to?” but “Do you want that money or not?”
One way to avoid it
There is just one way to avoid this extra hidden cost and that is to pay the arrangement fee up front.
If your lender won't allow that, it may be they will allow overpayments, so in the first month you could make an overpayment the size of the fee.
Does this mean mortgages without fees are better?
Some lenders help with the fees and costs significantly, and there are even some remortgage deals with no fees. You need to weigh all the fees and charges, if any, against the interest you expect to pay during the deal, to see which is the best for you overall.
Your cheapest strategy will depend on your personal circumstances and the size of your outstanding mortgage.
Does this mean we shouldn't remortgage at all?
As I wrote earlier, with some people's SVRs currently being very low, sticking with them at the moment isn't necessarily a bad idea, particularly if you're overpaying your mortgage, or saving the difference.
However, many of us will be better off locking ourselves into a deal now, and those of us who won't will still need to do so again when interest rates climb higher. If you add up all the costs I have mentioned in this article, the debt interest, the fees, and the interest on the fees, you are still likely to be better off remortgaging. Lenders want you to be idle.
On the other side of the scale, brokers want you to remortgage as often as possible, so they can earn more fees and/or commission, and that also doesn't always make sense. Guessing the twists and turns of the mortgage market every two years is a bit like trying to forecast the weather next Tuesday.
A mortgage is a long-term commitment so, to cut down on both fees and guesswork, you could start thinking of it as such, and go for longer deals when they are cheap enough. Read Fix for five years at 3.34% to find out more.