In reality, the only certainty with regards to interest rates and mortgage rates are the rates today, everything else is just conjecture. Looking back at December 2021, when interest rates began to rise from a historic low of 0.1%, who could have forecast such a meteoric rise?
The decision not to increase rates in September brought to an end a run of 14 consecutive increases by the Bank of England MPC. When looking at a possible remortgage, each case is different and there are many different factors to take into consideration.
Current interest rate cycle
While many experts predicted a further rise in base rates in September, the vast majority of the MPC voted not to increase rates, this time round. The indication is that inflation is coming down, the UK economy is slowing and a further interest rate rise could tip the economy into recession. Whether the current rate of 5.25% is the peak in the current cycle remains to be seen. Some experts predict a further 0.25% increase before the end of the year but the consensus is that the peak is in sight.
This not only brings a degree of calm back to the mortgage markets, but it has also encouraged enhanced competition amongst lenders. Consequently, there are some attractive deals starting to emerge.
Factors to consider before remortgaging
Obviously, the headline mortgage rate and outlook for the future are the leading factors when looking at a potential remortgage. However, there are a number of additional issues which will have an impact on your negotiating position.
Your credit score and financial situation
While it is understandable that the main focus is on interest rates and mortgage rates, you also need to appreciate your credit score and financial situation. It may be that an improvement in your finances, perhaps reduced debt or an increase in household income, has put you in a stronger position. In theory, you would then be able to negotiate mortgage terms on a much sounder financial footing.
Equity in your home
Putting all other factors to one side, there is one thing which will dictate the mortgage rates available to you, the risk/reward ratio for the lender. This is reflected by the loan to value (LTV) ratio, which is the mortgage as a percentage of the value of the property. Where the proposed level of remortgage is relatively low, the stronger your negotiating position, and vice versa.
Mortgage options available
Figures released by UK Finance in June this year showed that a staggering 2.4 million fixed rate mortgage deals were up for renewal by the end of 2024. As many will have remortgaged on rates around the 2% level, some are facing increases of up to 3 times their original rate. Depending on your view of interest rates in the short to medium-term, there are several remortgaging options to consider:-
Switch to a standard variable rate
At the moment, there is a consensus that interest rates will stay around the current level for the next two years although this is subject to revision. The average standard variable rate is currently around 8% which compares to just over 5% for five year and slightly higher for two year fixed rate deals. If interest rates were to rise, this would exert upward pressure on the standard variable rate. On the plus side, a significant reduction in interest rates would see the variable rate follow suit.
Fixed rate mortgages
Currently, the average two-year fixed mortgage rate is around 5.6% falling to 5.2% for a five year deal. This gives the clearest indication yet that interest rates are expected to remain steady over the next two years and then start to fall. There is a significant difference between the current fixed rate mortgages on offer and the standard variable rate of lenders.
Tracker mortgage
Tracker mortgages tend to track the Bank of England interest rate. Whereby the lender has a degree of discretion with regards to standard variable rate mortgages. There are the same pros and cons for these two arrangements, you benefit when interest rates fall but you would see increased mortgage payments when rates rise.
Summary
After looking at all of the factors, there are two distinct positions. If you are prepared for a degree of uncertainty, and perhaps believe base rates will fall significantly in the short-term, then a standard variable rate or tracker mortgage may work best for you. If you think base rates are unlikely to fall markedly in the short to medium-term, then a fixed rate mortgage, with fixed payments for the duration, may be the best move for you.
Whether your current fixed rate mortgage is coming to an end, or you are considering your options, please contact us and we can discuss the situation in more detail.