LOW INTEREST RATES: SHOULD YOU RE-MORTGAGE NOW?
The Bank of England slashed interest rates in March as the impact of coronavirus became clear. While it’s not good news for savers, it could offer an opportunity for mortgage payers to slash their bills.
The Bank of England base rate is what the central bank charges banks for lending. As a result, it has a knock-on effect on the interest we earn on savings and the cost of borrowing. For most of us, a mortgage will be the largest loan we ever take out. Even a seemingly slight change in the interest rate can mean significant savings, especially when you look at the cost over the full mortgage term.
Since the 2008 financial crisis, the Bank of England base rate has remained at a low. It’s piled pressure on savers but it has meant that borrowers have been able to secure good deals.
In November 2017 and August 2018, the base rate increased by 0.25% each time as the economy began to recover from the effects of the banking crisis. It was widely expected that gradual increases would continue in 2020 as GDP strengthened. However, the Covid-19 pandemic, and subsequent economic impact, changed that.
Coinciding with the 2020 Budget, which focused heavily on providing support during the pandemic, the Bank of England announced it was cutting rates from 0.75% to 0.25% on 11th March 2020. Just a week later the base rate was slashed further to 0.1%, a historic low.
After more than a decade of low-interest rates, the rates have become ‘normal’. But looking at the long-term average, interest rates have typically hovered around 6%, over the last few decades there have been several times where they’ve exceeded 10% piling pressure on borrowers. So, if you’re a mortgage payer now, the lower interest rates could present a great opportunity.
The impact of interest rates on your mortgage repayments
Even small changes in the interest rate you pay on a mortgage can have a big impact on your outgoings. Let’s say you have £200,000 remaining on your mortgage and a term of 25 years:
- An interest rate of 2% would mean monthly payments of £848 and the total cost of the mortgage adding up to £254,313
- If the rate of interest increased to 5% monthly outgoings would rise to £1,169, taking the total cost of the mortgage to £350,754
Please note: Calculations are based on a capital & repayment basis excluding any other associated costs.
As a result, a rise of ‘just’ 3% in the interest rate would mean paying almost £100,000 extra on your mortgage. The low interest rates present an opportunity for homeowners to reduce costs or make overpayments to pay off their mortgage quicker.
If your current mortgage deal has come to an end, the recent cuts by the Bank of England could be perfectly timed for you. If your current mortgage deal has expired, whether it was a fixed or variable rate mortgage, it’s always worth checking what other deals are available. You will often have been moved onto the lender’s Standard Variable Rate, which is unlikely to be competitive.
7 things to do before you remortgage your home
1. Gather your mortgage paperwork: Before you start looking for a new mortgage deal, make sure you understand how much you still owe and what your existing interest rate is. It’s essential to have a clear comparison and to double-check how much you’ll need to borrow. It can help speed up the process too.
2. Have you home valued: Since buying your home it’s likely that the value has changed, sometimes considerably. If the value of your home has increased, this will mean you own a greater portion. This is important when it comes to looking for a mortgage as the lower the loan-to-value ratio the better deal you’ll be able to secure.
3. Check your credit score: Your credit report and score are important when you’re a first-time buyer, and it’s no different when you’re looking to remortgage. Potential lenders will use your credit score to assess how likely you are to default on payments. If you have a high ratio of debt or other red flags on your report, taking some time to correct these where possible can help reduce overall mortgage costs.
4. Understand what you can afford: When remortgaging your monthly outgoings typically fall. But there may also be an option to release equity from your home. It can be an attractive option and may allow you to undertake renovation or extension projects, for example. If you’re interested in borrowing more, be aware that repayments or the length of your mortgage may increase.
5. Search the market: There are hundreds of potential lenders to choose from, including those without a high street presence and searching the market can be a challenging and time-consuming task. However, choosing the right mortgage provider for you is important for securing a competitive deal. Lenders have individual criteria so the one that was right for when you last took out a mortgage may no longer be the best option. We’re here to help you search the market with your circumstances and criteria in mind. We have a free tool you can use on this website to see the current rates on the market.
6. Start looking at deals early: Most lenders will allow you to secure a rate with them three to six months before your current deal ends. Searching now, whilst interest rates are low, can help lock in savings. It also means the transition will be smoother and you won’t have months in between the two deals where you’re paying a higher interest rate.
7. Check for potential repayment charges: Make sure you know when your existing deal ends and line up the new deal to follow this. Many mortgages have an early repayment charge that could cost thousands of pounds if you remortgage before the end date.
Please note: Your home may be repossessed if you do not keep up repayment on your mortgage.
Do not hesitate to contact book an appointment with us if you would like to discuss this further on www.calendly.com/tendayi