Getting a new mortgage on your current home, also known as remortgaging, is a very important financial decision that can impact your finances by thousands of pounds every year.
The cost of a mortgage can vary dramatically, depending on your mortgage interest rate. If you’ve had your mortgage for a few years, or you know that your current fixed rate deal is coming to an end, it’s important to review your options properly and decide on a next step.
Credit reference agency Noddle published research in July 2018 that found homeowners spend less time choosing a mortgage than choosing a holiday, even though making the wrong decision on a mortgage can have serious financial repercussions.
It found consumers spend five days on holiday research, six days choosing a car and only 3.6 days choosing a mortgage.
Noddle found 26% of consumers choose the first available mortgage, which it says “could be a costly mistake” because the difference in interest rates between the most and least competitive two-year fixed rate mortgage currently varies from 1.84% to 4.22%. With a mortgage of £300,000, the lower interest rate would save you £4,500 per year in interest repayments!
Historically low mortgage rates
The Bank of England base rate, which mortgage interest rates are based on, was increased to 0.75% at the Monetary Policy Committee’s meeting on August 2, 2018. This is only the second time the base rate has been increased since rates were slashed in the wake of the 2008 financial crisis.
Historically, 0.75% is still an incredibly low interest rate, which has helped keep mortgage costs down after the financial crisis.
Mortgage rates can go down as well as up…
Not everyone was lucky when the Bank of England cut the base rate so dramatically in late 2008 and early 2009.
The base rate was 5% in August 2008 – so, any homeowners who agreed to a fixed rate mortgage in the months leading up to the base rate cuts were then stuck with a relatively high rate for years. The best two-year fixed rate deals in August 2008 were 6.59%, or you could get a slightly lower rate if you agreed to a five-year fix.
However, lenders were also offering variable rate mortgages of base rate plus 0.50% in August 2008. Some lenders offered these deals for the duration of a mortgage. If you were lucky enough to sign up to one, you’ve had almost a decade of paying an interest rate of just 1% on your mortgage.
In short, then, it’s important to remember that interest rates can change very rapidly – though, being so close to 0% already, they’re unlikely to go down significantly. The Bank of England is also unlikely to increase interest rates rapidly, as that could cause major financial distress for millions of homeowners.
How to get the best mortgage deals
The more equity you have in your property, the better deals you can get. Equity relates to the proportion of your property that you own. You increase your equity by making payments to your lender through a repayment mortgage, or if the value of your home goes up. You can also increase your equity by overpaying your mortgage, which can be a savvy way of reducing the total amount of interest you’ll pay over time.
So, when you first buy a property, if it costs £250,000 and you put down a £25,000 deposit, then you own 10%. This means your loan-to-value (LTV) ratio is 90%. As your LTV ratio decreases (85%, 80%, 75%, etc.) – i.e. as you make your monthly repayments, or the value of your home goes up – you will qualify for cheaper mortgage deals.
Is it the right time for you to remortgage?
With a fixed rate mortgage, if you try to remortgage before the end of the fixed rate term, you may be hit by an early repayment charge (ERC). This charge is often a percentage of the size of your mortgage – so it can be tens of thousands of pounds. To find out what your ERC might be, phone up your lender and ask.
Potentially, the best time to remortgage to a fixed rate deal is just before an interest rate rise. The difficulty is trying to judge when this will happen.
Mark Carney, following the August 2018 decision to increase the base rate to 0.75%, said that further base rate increases are “likely” – but the precise timings and speed of any rise could be impacted by Brexit negotiations.
Previously the Bank has said that rates will rise but any increases will be “gradual.” So, it’s likely rates will rise over the next few years but probably by no more than 0.50% a year.
If this happens, locking into a fixed deal now is potentially a good move because these deals still have low rates. They’ll go up when a base rate rise occurs.
If your mortgage deal is coming to an end, you need to find out how much is still outstanding on the mortgage and how much your home is worth. This will help you establish how much positive equity you have, and thus what the LTV ratio and interest rate would be on a remortgage.
If you owe £200,000 on a home valued at £400,000, your LTV ratio will be 50%. Once you get to 60% or below for your LTV ratio, the best deals become available.
The latest data from Moneyfacts shows the best rate on a two-year fixed rate deal is 1.55% from the Post Office, with a fee of £1,495. Yorkshire Building Society has a deal at 1.61% with a £495 fee, while The AA has a rate of 1.89% with no fee. You need an LTV ratio of 65% for the Yorkshire product or 60% for the other two.
The best five-year deal currently available is from HSBC at 1.94% with a £999 product fee available to borrowers with an LTV of 75% or less. For borrowers with less equity, an 85% LTV ratio, HSBC has a product with a rate of 2.09%, also with a £999 fee.
What type of mortgage should you switch to?
A fixed rate mortgage provides security because you know exactly how much you will pay each month for the term of the mortgage product, but you won’t benefit from any reductions to the Bank of England base rate. However, with base rate being at such a low level for almost ten years, that is not really an issue because it can’t fall much more.
The time to select a fixed rate deal when remortgaging is when the base rate is low but expected to go up.
Variable rate mortgages can rise and fall with changes in base rate – but because the base rate is so low, it’s more likely that the rate will go up in line with any base rate increases.
So, in theory, the best time to select a variable rate deal is when rates are higher but expected to go down.
From a lender’s perspective, a remortgage is just like a normal mortgage – and thus there are usually some fees and charges that need to be paid.
The biggest decision with mortgage fees is whether you bite the bullet and pay them up-front, or defer payment and add the fees to the principal debt of your mortgage. Obviously, the first option is much more expensive in the short term – and the second option is easier on your short-term cash flow, but can cost you thousands more in interest over a 25- or 30-year mortgage term.
Another factor to consider is that some lenders have mortgage products that are fee-free but have a higher interest rate. For instance, a lender’s “best” two-year fixed rate mortgage might have an interest rate of 1.5% and a product fee of £1,500 – but they could also have a fee-free product with an interest rate of 1.7%.
When looking for a mortgage, it’s important to note that the “overall cost for comparison” (sometimes called APRC) only helps you understand the total cost of the mortgage over the full term. If you intend to remortgage after the introductory period – which is usually the sensible thing to do – then it’s the introductory interest rate and fees that you should really focus on.
Ultimately, the best mortgage for you will depend on your long-term mortgage and homeownership strategy. If you plan to regularly remortgage to new fixed-rate deals, then always opting for the lowest interest rate might make sense – but if you keep adding the fees to your mortgage debt, you could end up paying a lot more in interest over 25 years. On the other hand, if house prices are going up, and/or you’re planning to add value to your home while you’re there, then the short-term boost in cash flow could be more appealing.
In short, you need to sit down with a calculator and really do the maths before you decide if now is the right time to remortgage your home.
Now read our guide on how to prepare for an interest rate increase on your mortgage