General Council on Central Commerical Economics

Guest Article by Melanie Taylor of Mortgage Company Think Money

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.

As the credit crunch hits the UK, Fairinvestment.co.uk, leading online comparison site, announces that prepaid credit cards are no longer just for people who have bad credit histories, and could be the answer to those who are looking for the functionality of a credit card but want to avoid the risk of debt.

“A prepaid credit card offers a simple, effective and safe way of paying. You top up the card with money and then use it to pay for goods, safe in the knowledge that you can never go overdrawn or into debt,” explained Phil Alcock, credit card expert at Fairinvestment.co.uk.

There are currently about 2.3 million prepaid credit card holders in the UK, and this figure appears set to keep on rising as people realise the benefits of a prepaid card - by 2010, the prepaid credit card market is estimated to be worth around £4billion with more than 7 million prepaid card holders*.

Because prepaid credit cards offer the same functionality as a credit card but without the risk, they have generally been associated with people who have bad credit histories and who have found it difficult to get a normal credit card. Although prepaid credit cards still offer this valuable service, they are increasingly being used by people who could easily get a standard credit card but choose prepaid for their flexibility and convenience.

Prepaid credit cards are a good method for making online payment, this is because the only money that is at risk is what is loaded onto the card. The Optimum Prepaid Master Card has been specifically aimed at people concerned about the security of online spending.

Anthony Graham, Marketing Director at 360money, the prepaid network behind Optimum, commented, “People are increasingly worried their banking details might fall into the wrong hands when they purchase online, and with good reason. Optimum allows people to enjoy all benefits of shopping online without having to fear of fraudsters accessing their banking details.”

Prepaid credit cards are also a very good budgeting tool – users can pick their limit, load it onto the card and that becomes their budget. It is for this reason that they have become very popular with parents who want to give their children financial independence but limit their spending power.

“Parents looking for a way to educate their children to be responsible with their money find that prepaid cards provide an excellent teaching method because they give the child the chance to be independent and even purchase goods online, but there is a strict budget in place. This can be handy for everyday life, or perhaps if a child is going on a school trip where they need cash,” said Mr Alcock.

Prepaid cards, which can be used all over the world, have also seen a hike in popularity as families begin to use them on holidays abroad to keep their holiday spending in check.

The currently available prepaid credit cards are also highly convenient as they can be topped up at designated retailers, online, in banks, via BACs and then spent in store, online, at cash points and anywhere in the world with the Maestro acceptance mark.

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