Money: Fixed up with a cheaper loan

Are you stuck when it comes to mortgages? In a new fortnightly series, an independent broker suggests ways for 'IoS' readers to get the best deal

Tudfil Adams and her partner Mike Bevan live in Powys and feel they are stuck in a mortgage rut - paying over the odds for a long-term fixed-rate home loan.

Ms Adams says: "My reasons for taking out this fixed deal initially were in part for financial security but also for the convenience of having all my arrange-ments with my high-street bank. Now I feel the convenience has proved an expensive option and I now wish I had put a little more effort at that time into my choice of mortgage."

Ms Adams, 45, is county librarian and Mr Bevan, 54, is a retired college lecturer. They have a combined income of pounds 43,000 a year and took out a pounds 54,000 mortgage in 1994 on a 17-year term. This is split between a repayment (pounds 33,600) and an interest-only deal backed by an endowment (pounds 23,400).

However, their current fixed rate, with Lloyds Bank, runs until 2004 and it's payable at a punishing 8.99 per cent. With variable rates now around 6.8 per cent, they feel they should be able to get a better deal.

Simon Tyler says: "The benefits of fixed-rate mortgages are obvious - they provide security and certainty of payment for the specific fixed period. However, there are points in the economic cycle when these fixed rates can leave you high and dry. With five years to go, this couple are paying approximately 3.5 per cent more each year than necessary."

After studying the problem, Mr Tyler came up with a solution that should save the couple around pounds 12,500 - and cuts three years off their repayment mortgage.

The problem

Mr Tyler says the basic saving is easy to spot: if Ms Adams and Mr Bevan could save 3.5 per cent on their current payment (pounds 474 in total), they should be able to knock pounds 160 a month off the loan. But in this case it's not so simple - there are only 12 years, until May 2011, remaining on their current deal: "With a repayment mortgage it is best to match the new repayment term to the existing term," Mr Tyler says. In other words, if you are looking to swap an existing mortgage, don't fall for patter that suggests massive savings on the basis of a new 20- or 25-year deal. Decide what suits you. You may improve cash flow now by adding to the term of your loan, but don't saddle yourself with unnecessary debt stretching well into retirement.

The short repayment term limits the savings and the deals available. The "best" scenario on offer shows saving of pounds 78 a month on what they pay now - much less than the estimates of pounds 160 a month.

The solution

The current balance on the repayment part of the loan is pounds 30,000. Mr Tyler suggests the best deal around at the moment comes from the Portman Building Society (01202 563502). It's a fixed rate of 5.49 per cent until May 2004. There are no tie-ins after the fix ends, and borrowers can pay off up to 25 per cent of the capital outstanding during the five years. By swapping to the Portman the couple would pay pounds 290 for the repayment part of the loan and pounds 107 for the interest-only part of the mortgage, making pounds 397 in total.

Then there's the redemption penalty to consider: Lloyds will exact a hefty pounds 2,300 if the couple leave their fixed-rate deal early. As there are some savings available from Mr Bevan's retirement funds, it makes sense to pay this as cash rather than adding it to a new loan. Mr Tyler says: "In general, on a repayment mortgage it makes sense to meet the redemption costs in cash. It makes less difference on an interest-only loan."

There are other costs when you swap to a new mortgage deal: Mr Tyler suggests budgeting for a valuation fee of pounds 195, a completion fee of pounds 300 (this could be added to the loan) and legal fees of pounds 200. So by totalling the savings on a new deal over the next 60 months (the term remaining on the fixed rate) the couple would save pounds 5,220 - and have to pay pounds 3,000 in costs. This adds up to a pounds 2,220 saving overall.

There are other ways to deal with this. Mr Tyler says: "The first option is to extend the term of the new loan to 17 years, which would increase monthly savings to pounds 138. Over the remaining 60 months of the existing deal they would save pounds 8,280 before costs, bringing the overall saving to more than pounds 5,000. But I think keeping the shortened mortgage term makes more sense."

Under this proposal, the couple swap the mortgage but carry on with their current payment of pounds 474 a month - they can afford this "comfortably". This would cut the mortgage term to 8.5 years, meaning the repayment part would be paid off in 2008 instead of 2011. Paying off early can save massive sums in interest and repayments; in this case, knocking three years off the deal saves pounds 12,500 in monthly repayments.

They would then have three more years paying pounds 107 per month for the interest- only mortgage, although they might be able to use the extra money they save to pay off more capital during the final three years - and then use the endowment as an investment.

The verdict

The couple are likely to go for the Portman BS deal. Ms Adams says:"My priorities have changed since I arranged my mortgage - at that stage I was really only thinking about my monthly repayments. Simon suggested I should consider paying off my mortgage early. This fits in well with my other plans and brings my hopes of an early retirement that bit closer."

n Simon Tyler works for Chase de Vere Mortgage Management.

n If you want a mortgage makeover, please send brief details of your circumstances, including your current mortgage (if any) and earnings to: Mortgage Makeover, Personal Finance, Independent on Sunday, One Canada Square, London E14 5DL. Or e-mail to i.berwick@independent.co.uk. All participants must agree to a photo and brief personal details appearing in the paper.