Choosing between a fixed or variable remortgage is an important decision when you switch lenders.
There are pros and cons in either case. But either way, remortgaging can be a very effective way to cut back on your household bills.
Has the value of your home increased since you last took out a mortgage on it?
If you have equity in your home, and a reasonable loan-to-value (LTV), you may be better off switching today to a new deal.
Given that for many people, most of their capital is locked away in their home, it makes sense to make this money work harder for you.
That’s because interest rates are still very low, and possibly lower than when you took out your current loan.
It’s doubly true if you’ve slipped onto your lender’s standard variable rate (SVR). This is the default rate that borrowers are placed on when the introductory discount period is over.
Most mortgage discount periods only last a short time – often two to five years. This is the average length of time usually offered on a fixed rate, tracker or discount mortgage.
The Financial Times reports that the difference between the average SVR and the average two-year fixed rate is at its highest level for more than eight years. Fixed rates are currently far more competitive.
Remortgaging: When Shouldn’t You?
Remortgaging isn’t the best choice for everyone.
If you’ve very little left to pay on your current mortgage, going to the expense of a remortgage is unlikely to leave you any better off. Not once you’ve totted up the cost of the application and set-up fees.
It’s the same if you know you’d face a hefty repayment fee to move lenders. In this case, you’ll need to do your sums and work out the difference to what would be your overall outlay. With the rates available today, it may still be worth your while.
Another reason for not remortgaging include your having built up a poor credit rating (perhaps you slipped into debt).
The new tighter mortgage rules now mean you have to jump through more hoops for a remortgage application. While you may have been accepted for a loan in the past, you may not today.
What’s the Best Type of Remortgage for You?
Should you opt for fixed mortgage? Certainly there are some very good deals available. If you do, should it be short-term, say two years, or medium-term, say five years, or even long-term, say 10 years?
Or, given that interest rates are still low, should you choose a variable mortgage? These come usually in the form of a discount for a set period from the lender’s SVR or as a tracker which usually tracks a little above the base rate.
If the decision seems complicated, make your starting point your current situation and your future plans. Are you likely to want to move in the next few years? Could your circumstances change? Are children on the way? Is divorce possible?
Right now it’s still relatively cheap to fix your mortgage repayments for the longer term. But bear in mind that monthly repayments get higher the longer you fix.
- The big pro with a fix is security. Your payments won’t change for the duration of the fixed term. So you can budget safely.
- The main con with a fix is that if you do have to get out quickly, you’ll probably face an early repayment fee.
So fixing makes more sense in these two scenarios:
- You expect rates to rise in the next few years
- You’re as confident as you can be that you won’t move house in the fix period
With a variable product, your payments can fluctuate.
- The big pro with a variable rate is that you have more flexibility to change products without penalty
- The main con with a variable rate is that interest rates may rise and that your repayments will instantly rise
So, opting for a variable or tracker rate makes sense in these two scenarios:
- You think the Bank of England’s base rate is likely to stay the same or go down
- You’re unsure of your circumstances and think that a move might be on the cards
Will Interest Rates Rise?
A word about interest rates. These are currently at 0.5%. You’d have to have a crystal ball to give a definitive answer on how they will perform in the coming years however.
Doubts have been cast on whether interest rates will rise soon after inflation held steady at 2.4% in June.
The markets are uncertain, with many experts still anticipating at least one further rise this year to 0.75%. The Bank of England’s own forecast is for at least three further rises between now and 2021.
But with the current Brexit uncertainty, it’s anyone’s guess.
Would you like to discuss your circumstances informally? You can contact us at MAS any time you have issues or need advice on re-mortgaging here.