Mortgage borrowing can save you money if you pick the right option

Take a houseproud, homeowning couple with secure double incomes slightly above the average and overheads that are significant, but controllable.

Since they purchased their property almost a decade ago, it has more than trebled in value.

This couple has decided that they are comfortable using their family home as security to finance a new kitchen, complete with wooden panelling, integrated utilities and sparkling white tiles.

Rather than taking out a home improvement loan at an annual percentage rate of interest (APR) of 8-10 per cent, they can see the financial advantage of extending their mortgage. That way the interest they have to pay will be at the lower home loan rates, which tend to fall under 4 per cent.

So should such a couple opt for a simple top-up, or take the opportunity to remortgage and switch their mortgage to a new, cheaper lender?

The answer depends on how much the couple wants or can afford to borrow, how much they can save on interest rates and how much either option will cost in legal, administrative or other fees.

According to Mr Paul Crewe, of Mortgages Direct, the average top-up among its clients now stands at about €29,000, while the average remortgage is €137,000 and usually comprises the original mortgage capital of €80,000-€90,000 and new debt of €40,000-€50,000.

"If you are looking for more than €30,000, people will look to remortgage rather than top up. Anything less than €25,000 and you would have to question a remortgage, because you are looking at around €1,000 in legal fees," says Mr Crewe.

Typical quotes for a new kitchen range from €15,000 to €20,000.

But before the couple shy away from remortgaging, they should note that there are possibilities to get cut-price deals on legal fees.

Ulster Bank has a free switcher service for people who move their custom to them - not a bad idea, considering their tracker mortgages are very competitive.

"The main advantage of a remortgage over top-ups is that you can save on rates," says Mr Ronan Mackey of NC Mortgage Brokers.

"If you're a Bank of Ireland customer and you're paying its standard variable rate of 3.6 per cent, then you're getting pretty screwed on rates and would probably be better off remortgaging," he says.

Homeowners with €100,000 left on their mortgage would save €4,300 in total interest payments if they moved from a rate of 3.6 per cent to 3.25 per cent, the lowest standard variable rate currently available on the market, offered by EBS.

This should more than cancel out any legal fees incurred in the switch and give homeowners scope to borrow more without racking up too much in extra interest payments.

Lower tracker mortgage rates, which may also be available depending on the loan-to-value ratio and the size of the outstanding balance, mean there could be even greater savings available.

However, some lenders offer straightforward free top-ups, Mr Mackey adds.

"IIB has an unsecured top-up facility for up to €25,000. There is no legal fees involved in that, so there's no cost to you."

If the kitchen-renovating couple is paying back their mortgage through niche products such as Permanent TSB's One Plan chequebook mortgage, then releasing equity will simply be a matter of availing of top-ups pre-approved up to 75 per cent of the property value.

Mr Mackey describes this product as "a handy facility, but a little bit on the expensive side".

This is because One Plan customers are charged Permanent TSB's standard variable rate, currently above average at 3.55 per cent.