Looking To Remortgage – Act Now Before Rates Rise
2017 saw the Bank of England increase their base interest rate, from 0.25% to 0.5%, for the first time in a decade.
Although many believed that a further hike would take place this February, the Monteray Policy Committee (MPC) voted to leave rates at 0.5%.
However, due to the tone of the MPC meeting and state of the economy, another base rate hike is rumoured to be pencilled in for some time in 2018.
The date and the percentage of the hike have not yet been confirmed, though economists have predicted the base rate increase will happen this May.
Of course this is all speculation, but the Bank of England has expressed that there will be two more rises by 2020; in addition, following February's MPC meeting, the MPC is now predicting that the base rate will reach 1.2% by the start of 2021.
Term Funding Scheme
Following the UK's vote to leave the EU, the Bank of England cut their base interest rate down to emergency levels of 0.25%.
After the Bank of England's base rate slash, they introduced the Term Funding Scheme that was designed to provide additional support to growth and achieve a sustainable return of inflation.
The Term Funding Scheme effectively gave the opportunity to banks and building societies to borrow large amounts of money for free; Lloyds took £18bn, RBS £14bn, Barclays £10bn, Nationwide £9.5bn and Santander £8bn.
From 28th February banks and building societies have to repay the money they borrowed plus interest. This could lead to lenders hiking their mortgage interest rates and offering potentially more attractive savings rates to generate more capital to repay the Bank of England.
Time to remortgage?
In December 2017, there was a 41 percent increase of remortgage deals in comparison to the same month in 2016.
It was reported that there were 39,943 remortgage deals in December, compared to 28,400 the year before.
This increased remortgage activity may reflect the flavour for the 2018 homeowner market.
The end of the Term Funding Scheme and the increase of the Bank of England's base interest rate ( along with any other potential base rate interest hikes) may be enough to make you consider remortgaging your property.
Why should I remortgage?
There are many reasons why you may benefit from remortgaging your property.
Reduce your payment term …
You could potentially reduce your payment term through remortgaging your property. This could be an appealing prospect, as you could pay off your mortgage and live mortgage-free faster.
The benefits of living mortgage free are well documented: it makes it easier to move in the future, it reduces the cost of living and it could enable you to put more money towards something you want.
Release equity …
Securing a finance to enable you to invest in something, refurbish your property or purchase another property may be difficult. Remortgaging your existing property could be a viable option for you to source additional finance. By remortgaging your property, you could release your existing equity and receive a significant amount of capital.
Remortgage to get a lower rate …
Depending on your current mortgage, you could remortgage your property to access a lower interest rate. For example if you have a fixed rate mortgage and your initial fixed rate period has expired, then you will be subject to your bank’s higher standard variable rate – remortgaging could help you secure a lower rate of interest and save you a significant amount of money.
Remortgage for certainty …
As highlighted above, one of the biggest reasons to remortgage your property in 2018 is the UK’s changing financial landscape. Economists are predicting that there will be a further base rate rise soon and Mark Carney, of the Bank of England, expects two further rises over the next three years.
If you are able to find an attractive remortgage deal, you could secure a lower rate of interest for a prolonged period of time. If you decide to remortgage your property on a fixed rate, you could potentially insulate yourself from any increase of the base rate during your fixed rate period.
Types of remortgage
There are a number of different types of mortgage you could take out to remortgage your property.
Standard variable rate…
The standard variable rate (SVR) is the underlying interest rate that a lender will charge. The SVR usually is charged following the end of a fixed rate period or introductory period ends.
Typically, SVRs are rates that are affected by the Bank of England’s base rate. The majority of UK bank’s SVRs will change when the base rate changes. It should be noted that, from the Bank of England’s base rate increase in November 2017 to January 2018, the average SVR has increased from 4.6% to 4.7%.
Following the increase in SVRs, the variable rate remortgage deals shrank by 2 percent in December. This is because it is less advantageous to take out a mortgage on a SVR.
Tracker …
Although SVRs are affected by the Bank of England’s base rate, tracker mortgages are heavily dependent on the base rate set by the Bank of England. Therefore, any base interest rate increase will be passed directly to the mortgage.
A recent example of tracker mortgages’ movement is the average two-year tracker mortgage rate went up from 1.77% to 2.02% in the final two months of 2017.
Tracker mortgages may not be the best option for you if you are looking to reduce the amount of interest you pay on your mortgage. This is because the MPC has already predicted that the base rate will increase substantially in the near future; therefore, any base rate hike will be passed directly onto your tracker mortgage.
Fixed …
If you are looking to remortgage your property, then the fixed rate mortgage may be a good option for you.
Fixed rate mortgages allow you to secure an interest rate on your mortgage for the duration of the fixed term. Most UK banks offer fixed rate mortgages for 2,3,5 or 10 years; the longer the fixed rate term, the higher the interest rate.
Taking out a fixed rate mortgage may be a prudent move to remortgage your property, especially with the recent and potential future base rate interest increases. Although the current crop of fixed rate mortgages on offer are more or less on par with tracker and variable rates, they can give you peace of mind and insulate you from future interest rate increases.
However, it should be noted that Halifax upped their rates on some of their fixed rates by up to 0.3 percentage points. In addition, Nationwide have increased some two-year fixed rates by 0.05 percentage points.
It is likely that more lenders will follow Halifax and Nationwide’s lead and increase their fixed rate mortgage rates too. Many have predicted that it is just a matter of time before lenders increase their rates; therefore, remortgaging your property may be your best option to avoid a higher rate of interest.
Bear in mind that when you take out a fixed rate mortgage you could end up paying higher than the interest base rate.
For example a fixed rate mortgage could force you to pay 5% for 5 years and the base rate could remain low throughout.
Remortgaging application process
Whether you want to remortgage your property with a fixed rate, tracker or variable mortgage, you may want to review the remortgage process before you decide to remortgage your property.
The process to remortgage a property is similar to applying for a first time mortgage.
Time …
If you are looking to remortgage through a traditional lender, then it may take as long as or longer than a regular mortgage. It is not uncommon for an application with a traditional lender to take up to several weeks or even months to process. The length of the application process could mean that you are stuck on your current interest rate longer than necessary.
Review of affordability …
Throughout the application process, traditional lenders will consider the affordability of the remortgage. You will likely need to provide documentation in order to satisfy the lender that you can afford the remortgage payments.
Traditional lenders’ requirements will differ depending on the lender, but you will normally have to provide:
- bank statements
- pay slips
- details of your current mortgage
- any details of the property you wish to remortgage
Credit history check …
Traditional lenders will also require a review of your credit rating, as they will want to scrutinise your credit history to ensure you can service mortgage repayments on time. You can check your credit history on websites such as Experian.
Fees …
Depending on your set of circumstances, your existing mortgage and the lender, you may have to pay some fees to remortgage your property. Typically, lenders will charge legal costs, valuation fees and arrangement/ administration fees.
Mortgage broker’s assistance
Although a number of remortgage deals are available in the UK, the most competitive rates are not found in the high street or on comparison websites.
Unless you have an up to date knowledge and deep understanding of the financial services industry, it is advisable to seek the assistance of a mortgage broker.
A good mortgage broker will be able to find the best remortgage deals available to you, identify the remortgage deal that gives you the best financial advantage and secure the mortgage deal you want.