How mortgage lenders are hiking switching costs by stealth

housesMortgage lenders are in the business of making money, and in the last five years they have found a new way to squeeze more out of borrowers who want to switch their mortgage deal.

Many remortgage deals used to be packaged up with 'free legals and valuations' to reduce the upfront cost to the borrower and encourage them to switch. However, new figures show that lenders have gradually been chipping away at the number of deals that offer such freebies.The result is that the remortgage customer pays more to switch and the upfront cost could add up to hundreds of pounds.

Slowly, slowly
According to a study by financial information provider, Moneyfacts, lenders have been whittling down the number of freebies on their remortgage deals over the last five years.

It focused on two-year fixed rate mortgages and measured the proportion of deals that came with free legals and valuations in 2008 compared to now.

The number of deals with free legals has fallen from 53% to 47%, while free valuations have become more scarce – they were included in 51% of remortgage deals in 2008 but are now only available on 44%.

Sylvia Waycot, spokesperson for Moneyfacts, said: "It's funny how things disappear without us noticing that they were even fading from sight. However, that is what seems to be happening to free valuations and free legal fees for remortgages.

"Less than half of two-year fixed rate mortgages now offer these benefits, so shopping around is vitally important.

Jonathan Harris, director of mortgage broker Anderson Harris, agreed: "Sadly, great remortgage packages, where the lender threw in plenty of freebies, are a thing of the past. Now you would be lucky to get a free valuation, never mind free legals or lender's arrangement fee."

Steeper fall
The biggest fall in freebies was in the number of free accident, sickness and unemployment (ASU) insurance policies offered on remortgage products. These policies are very useful as they pay your mortgage for up to 12 months if you are unable to work.

In 2008, a significant 19% of two-year fixed rate mortgages offered ASU insurance as a freebie when you remortgaged; today it is almost a thing of the past as it is only available on 0.06% of mortgages – in other words just a handful of deals.

With unemployment sky-high, this type of policy could prove particularly useful to mortgage borrowers who lose their job though, of course, it can still be arranged separately if you can afford the extra cost.

Waycot stated: "The demise of ASU insurance at a time when money is tight and people are worried about job security adds another layer of misery. This insurance provided protection for at least three months at no additional cost but it is now out of reach for many."

Cheaper deals
However, while lenders have reined in their remortgage freebies, meaning borrowers have more to pay upfront, there is some good news.

Although the number of freebies on two-year fixed rates has fallen, so too has the actual interest rate on these products – and the drop has been significant.

According to Moneyfacts, the average two-year fixed rate in June 2008 was 6.66%, compared to just 4.72% now.

This has made a huge difference to borrowers' monthly repayments. On a typical £150,000 repayment mortgage a borrower paying 6.66% five years ago would fork out £1,028 a month to their mortgage lender. A borrower paying 4.72% now would pay just £853 a month.

That's a saving of £175 a month which totals £4,200 over a two-year fixed rate period.

And that more than outweighs any extra costs you will incur by remortgaging, such as legal fees or valuation fees. There is also a far greater choice of products – in 2008 there were just 178 two-year fixed rates compared to 589 now.

Waycot admits: "It can be argued that the removal of these additional benefits is more than compensated for in the lower true cost of the mortgage.

"However, most remortgagers are looking to raise funds with the minimum outlay, so the decline in free valuations and legal fees will be a bitter blow."

There are still plenty of remortgage deals available across the market – the Moneyfacts study focused on two-year fixed rates, but lenders will waive the legals and valuation fees on trackers and discounts too.

Harris insists: "The lack of freebies shouldn't put you off remortgaging. You may still be able to secure a great loan rate which makes remortgaging worthwhile, even if you have to pay fees."

But the fact that free remortgage deals are reducing in number means you now have to shop around. Look for deals with great rates but also consider arrangement fees, which have soared in recent years, and take into account which deals offer freebies on the upfront remortgage costs.

If you are not sure, you can always ask a mortgage broker to do the hard work for you and find the most suitable deal for your circumstances.
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