Interest rates have been gradually reducing since last year’s disastrous autumn mini budget, and there are predictions that interest rates may continue to fall, potentially reaching levels similar to those seen pre-pandemic.
So, is now a good time to remortgage? Whilst the current sentiment in the market is that rates will continue come down, we know how unpredictable the market is, and it seems we’re never far around the corner from a seismic event that can drastically alter the landscape and impact predictions.
But what can you do if your mortgage is up for renewal shortly.
Move onto a standard variable rate
With most mortgage deals, if you let your product run its course without choosing a new deal, you will revert to the lender’s standard variable rate (SVR). The SVR is usually significantly higher than most fixed rates and can rise and fall based on market conditions.
Currently, SVRs are around 6.5% to 7.5%, which could result in a sharp rise in monthly payments for those coming off the back of sub-1% deals. For example, a £300,000 mortgage over 25 years at 1.5% would have monthly payments of £1,200, whereas the same mortgage amount over the same term at 7.5% would have monthly payments of £2,217.
While SVR rates usually have no tie-ins, giving you time to monitor the market for potential rate drops before fixing, it’s important to consider that waiting could result in significant extra costs that may outweigh potential savings. There’s also no guarantee that rates will decrease
To be avoided if possible, or only for a short period of time if the rates are particularly high.
Chose a temporary or ‘short term’ tracker
A benefit of a tracker rate over a fixed rate is that they usually have low or no tie-ins, allowing you to choose a tracker for a period and observe how rates fluctuate before deciding to re-fix or remortgage.
Unlike fixed rate mortgages, which are not designed for short-term use and are priced based on borrowing over a predetermined period of time, fixed rates often charge fees for early exit.
Trackers commonly have no ERC’s or significantly reduced early exit fees, though they may have arrangement fees around £1,000 that need to be considered.
For example, you could choose a tracker, stay on it for 6 months, and then re-fix after 6 months if rates have come down. Regular tracker deals typically have rates lower than the standard variable rate (SVR) but may vary in competitiveness with fixed rates based on market conditions.
Potentially a better option than the SVR depending on the level of fees you need to pay. Comparing a tracker to a fixed rate would be purely speculative.
Chose a short or long term fixed rate
If you prefer certainty and the ability to budget over speculative gains from waiting on a tracker rate to potentially fix in a cheaper deal, fixed rates are available for different terms, most commonly 2, 3, or 5 years, but also for other terms such as 7 and 10 years.
Currently, longer-term fixed rates are generally lower than shorter-term fixed rates, which is contrary to trends observed in the last decade. Therefore, in this scenario, a longer-term fixed rate would likely save you money over the short term compared to a shorter-term fixed rate with a higher rate.
However, in the long term, the shorter-term fixed rate may be better if rates continue to fall and outstrip the initial saving offered by the longer-term fixed rate. Another consideration when choosing the length of your fixed rate is the costs associated with remortgaging.
Remortgaging regularly on shorter terms can accumulate fees that may eat into or even eradicate the interest rate savings you initially gained. It’s important to carefully consider your financial situation, future rate expectations, and potential costs when deciding on the length of your fixed rate.
Reserving a rate with a lender and not committing to it can be a smart strategy if your mortgage is due for renewal in the next six months. This allows you to hedge your bets and have the option to choose a new deal or reapply with another lender if interest rates fall during that period.
Additionally, with most lenders, you can change your mind on the product type after application but before completion. For example, if you initially opted for a 5-year fixed rate but want to see how the financial landscape pans out, you may be able to change to a 2-year fixed rate before completing the remortgage process.
It’s important to carefully review the terms and conditions of your mortgage agreement and work with a qualified mortgage professional to understand your options and make informed decisions.