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Mortgage rates are at an historic low in 2021. The Bank of England (BoE) base rate currently sits at 0.10% – the lowest on record – upon which high street banks and other mortgage lenders base their own rates offered to customers. As such, it is now possible for some people to find fixed-rate mortgage deals approaching 1%. With many people still sitting on a standard variable rate (SVR) mortgage – which typically involve higher interest rates – or a fixed-rate deal with a high monthly repayment, this does lead many people to ask: “Should I remortgage?”
In this article, our financial planning and mortgage team at Cedar House offer some reflections to help readers answer this question. We hope you find this content useful. If you’d like to find out more or discuss your own financial plan with us, please contact our team to find out more or to access personalised financial advice:
020 8366 4400 or email@example.com
A (potentially) short window
As a general rule of thumb, interest rates and inflation have an inverse relationship. This means that, usually, the economy grows when interest rates are low – leading to a rise in inflation. Yet central banks typically want to keep inflation under control. The BoE, for instance, has a target of 2% inflation. As such, when interest rates go up this usually leads to a reduction in economic growth and a decline in inflation.
At the time of writing (July 2021), the UK has witnessed rising inflation in recent months – with the Consumer Price Index (CPI) reporting a 2.1% in the 12 months prior to May; the fastest 6-month rise since the collapse of after the 2008-09 financial crisis. This has put the BoE on the spot to raise interest rates – which would, in turn, lead mortgage lenders to increase their rates.
Nobody can say for certain whether interest rates will rise in the coming months. However, this new rate of inflation should serve as an urgent nudge to consider remortgaging sooner rather than later – if you have been considering this option.
Reasons to consider remortgaging
Remortgaging refers to when you take out a new mortgage deal on your property. If you live in a flat with a SVR mortgage, for instance, then you could remortgage by taking out a fixed-rate deal with your existing lender – or, perhaps with a new lender.
For most people, keeping up repayments on their mortgage is their biggest monthly outgoing (this is setting aside the huge deposit you needed to secure the property in the first place!). So, any opportunity to lower the monthly cost should be carefully considered. Remortgaging can lead to savings worth £1,000s every year. Yet there can be other reasons to switch, too.
If your property has risen significantly in value during the lifetime of your current mortgage, then you may discover that you are now in a different loan-to-value (LTV) ratio band. Generally, the higher your equity the lower rates you can access. Someone with 10% LTV, for instance, almost certainly will face higher interest rates compared to a 30% LTV. If your current deal is ending soon then it is certainly a good idea to look at remortgaging (or you will likely be automatically placed onto the lender’s higher SVR). Yet it can also be worth looking at remortgaging whilst on your current mortgage, particularly if you want to move from interest-only to repayment.
Risks and drawbacks
Whilst 2021 certainly presents a unique opportunity for many people to remortgage, it will not be worthwhile for others. Your financial goals and circumstances play a big role here. In particular, if you have a relatively small outstanding mortgage debt then remortgaging may not be worth it. This is because much of your monthly repayments tend to cover the interest towards the start of your loan, but towards the end they cover more of the principal. This means that, after you have factored in the fees involved with remortgaging, the interest saving may not be worth that much.
Another drawback to consider is the early repayment charge terms in your mortgage. These can be very large and make it difficult to justify moving before the end of the incentive period. If this is the case, then your existing lender may let you do a product transfer (move to another one of its deals) for a lower charge. You should also be careful about remortgaging if the value of your property has gone down, which could result in you being offered a worse rate than your present deal. In worst cases, a property’s value can shrink below the mortgage amount you still owe – putting you into negative equity.
Other reasons to consider holding off on remortgaging include you holding little equity (e.g. less than 10% of the property value) or credit problems. With the former, you will likely find it difficult to find better rates on the market until your LTV improves. If you have a poor credit score, then it is usually a good idea to take steps to improve it before approaching mortgage lenders – as this will improve their perception of you as a credit risk.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or firstname.lastname@example.org