Why it’s so important to plan your remortgage.
As we all know, interest rates are on the increase. However, when we look at the news it tends to focus on the Bank of England base rate. Whilst the Bank of England base rate is vital in controlling inflation and an indicator of what is going on in the wider economy, in reality, unless you are on a variable rate mortgage it’s not the most important driver in dictating your fixed rate.
Why are fixed rates going up?
At the moment there are two main drivers that are pushing interest rates up. Firstly it’s the swap rates. Swap rates are the rates at which banks buy and sell money between themselves. So when a lender offers a fixed rate at a specific rate for a period of time it’s because they know how much that money has cost them and they can work out how much to sell it to you in order to work out the profit margins. These rates are increasing and the reason for that is that uncertainty in the market and economy tend to push these rates up.
The other factor is the lenders’ appetite to lend. Lenders really do want to lend at the moment however the problem that a lot of them are facing is that due to a spike in applications and a shortage of staff they are really struggling to keep up with demand. What many lenders do when this happens is increase the rates in an attempt to become less popular with advisers like myself who will always be looking to get the best rates possible. However, if all lenders are suffering the same problem then what can happen (which we are seeing now) is that lenders are almost in competition to not be within the top 3 lenders as they know that will drive too much business their way.
All these factors are meaning that as a mortgage adviser I’m seeing emails on a weekly basis from multiple lenders putting rates up. This means that waiting for a week or two to arrange the remortgage of your property can have a significant impact on the rates available to you and the total cost of the mortgage over the next 2 to 5 years depending on what we recommend you do for the next stage of the mortgage.
With this in mind, it’s vital that anyone with a mortgage that is due to expire within the next 6 months begins looking to arrange a suitable replacement for your current rate as it’s likely to increase – but we can potentially limit the increase by securing you a rate at the earliest time possible.
Why 6 months?
The reason that we recommend looking at reviewing your mortgage at 6 months is that for most lenders the mortgage offer that they issue is valid for 6 months. What that allows us to do is secure the rate with the lender when we submit your application. The lender will honour that rate even if rates increase over that time because that was the rate when you submitted the application to them.
What if rates start reducing within that 6 month period while I’m waiting to switch mortgages?
At the moment rates are just going up and if that continues then it’s likely that you will have secured a rate lower than any currently available on the market however if we see rates start to reduce we can still potentially take advantage of this. Our options are to either apply to another lender or to request a new offer on the lower rate with the existing lender we’ve applied for. I would weigh up whether any costs or fees involved with this are worthwhile for the savings you would make but I keep a constant eye on rates and trends so would be able to tell you if we need to reconsider our options within that 6 months between the mortgage offer being issued and the mortgage completing.
What if rates reduce during my fixed rate period?
Once your mortgage completes and has officially switched over to the new fixed rate you would not benefit from any interest rate reductions. This is why it’s important at the beginning of our conversations about your remortgage that we discuss how long you want to commit to a fixed rate and all the benefits and risks involved.
If your current deal ends anytime within the next 6 to 7 months please do not hesitate to contact me to discuss as planning your remortgage could lead to large potential interest savings, dependent on circumstances.