InvestingProperty

Is 2021 A Good Time to Remortgage? (UK)

If one thing is clear, the past couple years will go down in the history books as a year of significance.

With unexpected situations comes financial uncertainty. But, despite this economic uncertainty, it still might be a good idea to remortgage your home in the UK. The Bank of England cut Interest rates to a record-breaking low of 0.10%, which means that mortgage payments will fall for many.

Whether or not you should remortgage depends on the length of your mortgage, the kind of mortgage you have, and current interest rates.

Why Should I Remortgage?

Before asking how you can remortgage, it’s important to ask why. If you already can pay your monthly mortgage payments, why get a new deal if you are not intending to move? Here are a few reasons why you should consider remortgaging your house.

  1. You can save money overall. If you have a standard variable rate (SVR) mortgage, staying on it could cost you thousands of more pounds than switching to another mortgage at the end of the introductory period. Variable interest rates can climb high so finding another mortgage with a lower rate can help you save money.
  2. You can pay off your mortgage earlier by switching to one with more favourable returns. Some types of mortgages restrict how and when you can pay off your debt. Sometimes, agreements might have a penalty for early payment. You can find a new mortgage to find a deal that lets you pay off the money you owe faster. You will pay more each month but own your house faster. 
  3. Remortgaging can insulate you from economic uncertainty. Given the global economic uncertainty from COVID 19 and domestic uncertainty from Brexit, it seems like interest rates will continue to rise. If you have a variable rate, you can end up paying more. Switching to a lower rate plan could save you money if interest rates rise. 
  4. You want to switch to mortgage repayments from an interest mortgage. Interest-only mortgages used to be a popular option, but not anymore. Interest-only deals allow you to just make interest payments, but that means that the main mortgage debt never goes down. So, mortgage repayments are a better way to secure equity in your home. 
  5. You want to claim some equity of your home. When you put down a down payment, you are putting down an immediate claim to own a portion of the property. If you put down a 20% down payment, then you own 20% of the house. You gain more equity the more of your mortgage you pay off. Remortgaging allows you to leverage any increase in property value, which can give you larger equity of your house.
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When Is A Good Time to Remortgage?

Remortgaging is a great idea to reduce the interest that accrues each month. For example, if you have a mortgage with a fixed rate for an introductory period, then remortgaging near the end of the introductory period before interest rates start climbing can be a smart idea. 

The best time to start looking is around 3-4 months before the introductory period of your current mortgage is almost through. So for example, say you have a 5-year fixed mortgage. You should start looking to remortgage about 56-57 months through that 60-month period.  It takes about 3 months to secure a mortgage form a lender, so the earlier you start trying to remortgage, the more successful you will be. If you don’t, you won’t be able to find a deal within time.

The main point is that you want to remortgage before your introductory interest period ends. Most Brits have a standard variable deal, meaning that interest rates are tied to interest rates set by the Bank of England. Most mortgages have a fixed-rate period as well. When the fixed-rate period ends and the variable rate period begins, you will see your interest rates rise. Some lender organizations manage to keep variable interest rates an average of 2% higher than standard fixed-rates, but these are not the norm. One lender can have a higher interest rate than another lender. The average SVR is around 4.76% compared to the fixed-rate of 2.09%. 

To put these numbers in perspective, jumping from a 2% to nearly 5% interest rate on a £250,000 25-year repayment mortgage will see your monthly payments jump by nearly £300 a month. 

What to Look for When Remortgaging

Know your current rate

As we stated before, remortgaging can be a way to keep your interest payments low instead of exiting the fixed-interest period of your mortgage. If you have a standard variable mortgage, then figure out exactly what your current interest rate is, and what it will be when the intro-period runs out. This can be hard to do because interest rates change periodically, but you can look at similar mortgage broker products to get an idea. 

Even if you currently have a fixed-rate mortgage, you could still remortgage and find a deal with a better interest rate. So, before considering remortgaging, make sure you know exactly what your current interest rates are and whether you can get better ones by switching. 

Exit fee and penalties

You should also make sure to check your policy for any exit fees or penalties. Many mortgage agreements will only allow you to pay off a certain amount each month and will charge an early repayment fee if you pay off your mortgage early. A mortgage broker might have an early exit fee that applies if you opt-out of the mortgage before it is over.

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Just because you might have an early exit fee, that does not mean that you can’t remortgage. Just that you might have to take a financial blow if you remortgage. In some cases, the presence of an early exit fee or penalty can be a reason to not remortgage. 

Length of new mortgage

You should also consider the length of your new mortgage. Average interest rates in the UK have fallen since March, meaning that the average 2-year and 5-year fixed-rate mortgages have fallen by 0.06% and 0.05%, respectively. This recent withdraw of high loan-to-value mortgage will most likely be temporary, 

However, regardless of how long this recent interest rate cut is, borrowers who have a variable mortgage that is about to end will benefit from the cut interest rates. Fixing your mortgage for a longer period can afford you with more security and keep your interest rates lower as the economy starts to get back on its feet post-COVID-19. 

If you do not know how long you will be in your current property, there is always the option to get a “portable” mortgage. These kinds of mortgages can be transferred from one property to the other with minimal fees. 

Final Thoughts

So, is now a good time to remortgage? Given the amount of uncertainty in today’s economy, many homeowners are rightfully worried about keeping up with their mortgage payments. Given current historically low-interest rates, it might be best to take advantage of these rates. Remortgaging your property can lock in a standard rate interest so you pay less until interest rates rise again. Having a fixed-rate mortgage deal can bring your peace of mind as you always know exactly how much money you have to pay each month. 

So, if you are thinking about getting a new policy, then now might be the time to do it. If you wait too long, you might not be able to take advantage of historically low interest rates.

Tom
About author

Fully qualified CISI Investment adviser for 5 year. Managed UK private client portfolios.
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