Tips for remortgaging in a credit crunch

In the midst of the credit crunch, remortgaging can be a stressful experience for homeowners. The best interest rates are often only available if you are willing to pay a mortgage arrangement fee - and those on variable-rate mortgages can soon find their mortgage payments getting more expensive than they may have expected.

Lenders are being careful with their lending these days, but they are still being competitive. With that in mind, it makes sense to look around and ensure you are getting the very best deal on your remortgage.

Plan ahead

It's essential you don't leave your remortgage too late - any less than a month's planning could leave you pressed for time. Ideally you should leave at least 2-3 months to go over your options, which gives you enough time to look at what's available without rushing.

Find out all the costs involved

As with a new mortgage, there are many costs associated with remortgaging - so make sure you know exactly how much you are going to need.

Consider the mortgage arrangement fees associated with each deal. Many variable-rate mortgages come without an arrangement fee, but most fixed-rate mortgages do carry them. If you're willing to pay an arrangement fee, a fixed rate is probably worthwhile, since it gives peace of mind over how much you will pay each month, and can usually be added to your mortgage payments. However, if interest rates go down, you may end up paying more than you would with a variable-rate mortgage.

You will also need to consider any 'additional' services offered with your mortgage, particularly PPI (Payment Protection Insurance). If you can afford to pay the extra each month, PPI is worth having - if something occurs that prevents you repaying your mortgage, the insurance should cover your costs, often for over a year. If it's going to be a burden on your finances, though, it may be worth waiting until you are in a better position financially.

Make sure you're safe if your payments go up

This doesn't apply to fixed-rate mortgages, since the payments are the same each month - but there is a risk with variable-rate mortgages that if the interest rate rises, so will your mortgage payments. Make sure you have room in your finances for any unexpected rises, and expect your disposable income to take a hit if they do.

Some lenders offer a 'cap' on their variable rates, which could help you plan for the worst-case scenario (i.e. rates are as high as they can go).

Check for early repayment charges

If you are hoping to pay off your mortgage early, some lenders will ask for an 'early repayment charge' (also known as a 'redemption penalty'. The idea behind this is that it makes up for what the lender would have gained in interest, had you continued with the mortgage as normal. However, these most commonly apply during fixed rate or discounted rate periods and many lenders offer deals which don't include such charges.

Avoid mortgages with annual interest Some mortgages work out their interest on an annual basis, meaning the amount of interest you pay every month is based on the money you owe at the start of each year.

Mortgages with daily interest charge you interest depending on how much you owe at any given time, so as you pay off more of the mortgage, the interest decreases with it. This might not make a huge difference at the time, but over the course of your whole mortgage, you will end up paying a lot less in interest - and the mortgage can technically be paid off years earlier.

Melanie Taylor works for financial solutions company Think Money

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