Is now a good time to remortgage?

If you've been following the news, you might be a little worried about your mortgage deal, especially if it's coming to an end.

Since December of 2021, the Bank of England (BOE) has been increasing their base interest rate to offset the rate of inflation. The latest increase (22nd September 2022) saw a 0.5% rise from 1.75% to 2.25%, the highest level in 14 years. But with inflation still on the rise, market experts predict the base rate will climb to over 6% in 2023.

Why should I care?

Whether you're on a fixed rate mortgage, or a tracker or variable rate deal, there's a lot to be concerned about. When the BOE increases its base rate, mortgage rates follow suit.

If you don't remortgage when a fixed deal concludes, your interest rate converts to the lender's standard variable rate (SVR) - a level that's often consistent with the BOE's current rate. Likewise, those on tracker mortgages will see their monthly repayments rise in accordance with the BOE.

In other words, you'll be paying more interest on your mortgage, prolonging the time it takes to pay the whole loan back.

For most people, remortgaging is a staple part of the whole mortgage experience - but the question remains: should I remortgage now or wait? In this article, we strip back the complex mortgage jargon and provide some much-needed answers.

Should I remortgage now?

It's a big question, and one that needs a bit of context, but there's a long answer and short one:

The long answer is that it depends on several factors:

• The details of your mortgage deal.
• How long your fixed rate package has before it expires.
• Your financial situation.

The short answer is that borrowers who are reaching the end of their fixed term should lock in a new mortgage deal and remortgage as soon as possible. With the BOE's base rate set to increase to at 6% in 2023, all of the best available mortgage deals will soon dry up, leaving only packages with high interest rates.

When should I remortgage? - by mortgage deal

If you have a specific package, how do you know whether it's time to remortgage?

Fixed rate mortgage - when should I remortgage?

If you're on a fixed rate mortgage, you've essentially made an agreement to pay a certain percentage of interest annually for a fixed period: the most common being either two-year or five-year packages.

So when is the best time to refix your mortgage?

If you're a fixed rate borrower, and you're a year to six months away from the end of your fixed term, you should probably start thinking about remortgaging:

• When your fixed term is over, your interest automatically converts to the lender's Standard Variable Rate. As per standard, many fixed rate lenders place their SVRs at least 2 per cent over the BOE's base rate - so if the BOE's base rate (as predicted) rises to 6%, your interest rate could rise to a whopping 8%.
• This means when your fixed term concludes, you'll be paying much more in interest. As a result, the time it takes to repay the remainder of your mortgage will increase a-tenfold.
• By exploring available deals one year to six months before the end of your fixed deal, you gain enough time to scope out the best packages, and lock in a deal to pick up where your old mortgage left off. You'll never have to pay the lender's SVR and you can hopefully curb the onset of sky-rocketing interest rates.

If you're more than a year away from the end of your fixed deal however, things can get a little more complicated.

You can’t leave a fixed rate mortgage deal early without incurring an Early Repayment Charge (ERC). Lenders charge an ERC if you terminate or switch to another deal before the end of your fixed term.

Early Repayment Charges can be very expensive, costing from 1-5% of your outstanding mortgage. This, coupled with the usual exit fees associated with leaving a mortgage, can be hard on your wallet.

So, how do you navigate this? To begin, it's worth remembering that you're in an ‘okay’ position - you're currently guaranteed to pay the same amount each month. So, while you can't benefit from base rate cuts, you're still protected from rising interest rates.

First and foremost, check if your lender charges an ERC

If your deal is due to end in the next year or so, it's best to double-check whether there's an ERC to pay if you switch mortgages before the end of the fixed term. If there isn't, you've landed on your feet, and can switch mortgages without the expense of a large ERC.

Enquire with your lender about a product transfer

Some mortgage lenders offer product transfers to borrowers they've already lent to. The benefit of a product transfer is that your existing lender might let you switch from your current deal to a new one - sometimes without the hindrance of an ERC.

Product transfers also tend to forgo the usual affordability checks associated with a fresh mortgage application - meaning that if your financial situation has changed for the worse, you may still have a chance of securing a good deal.

With a transfer, you could end up with a better deal than your current mortgage, and you may avoid the repercussions of rising interest rates.

Evaluate your LTV and make an informed decision

The cost of an ERC depends on your Loan to Value (LTV) ratio. If you have a lot of debt outstanding, there's no point remortgaging early. The ERC will be so large that you likely won't save money.

If this applies to you, your best option is to wait it out. Overpay your mortgage where possible and see what you can afford a few months before the end of your deal.

If you already have a good LTV (60% to 30%), you may be able to remortgage and bite the bullet with an Early Repayment Charge, knowing the deal will be worth the sting.

Consult a mortgage broker

Ultimately, you need to talk to an expert in mortgages. Reliable mortgage brokers can help you find remortgage deals that are tailored to your circumstances, giving you the confidence to make an informed decision.

Overpay your mortgage

For most fixed rate deals, lenders allow you to overpay by a certain amount each year. Overpaying your mortgage means to exceed the amount you usually pay in monthly mortgage payments.

Check with the provider of your fixed rate deal to determine how much you can overpay. Most lenders allow you to overpay by 10% each year.

By overpaying your mortgage, you can negate your loan’s rate of interest and reduce your LTV much more quickly. This is particularly useful for those borrowers who are unable to remortgage due to high LTVs and ERCs.

Get an agreement in principle

Last but not least, always exact an Agreement in Principle (AIP) from your potential new lender. AIPs can lock in the mortgage package you want for up to six months, allowing you to make the most of interest rates half a year before the time comes to remortgage.

Tracker mortgage - when should I remortgage?

A tracker mortgage is a type of variable-rate mortgage. You're not locked into a fixed rate, but pay the current market rate. As a result, your monthly payments can go either up or down.

The average deal for a tracker mortgage is either a five-year exclusivity package or a lifetime tracker, which locks you in for the duration of your mortgage.

So, when should you remortgage with a tracker package?

Because trackers change with the base rate of the BOE, you should remortgage as and when interest rates are expected to rise. As your tracker's end date approaches, keep an eye on the news so you know what to expect.

Get an agreement in principle

As with those on fixed rate deals, if you're on a tracker mortgage you should always exact an AIP from your new provider. This should lock in your mortgage deal for at least six months, allowing you to make the most of, what could be, lower interest rates.

The pros and cons of remortgaging

Why should I remortgage?

• You're reaching the end of your current fixed rate and want to avoid your lender's SVR.
• You want to borrow money for much-needed home improvements and developments.
• You could get a better deal than your existing mortgage and save money.
• You could avoid the onset of interest rate rises.
• You could switch to a better mortgage deal and pay back your mortgage quicker.

Why shouldn't I remortgage?

• Your Early Repayment Charge is too high because you have a high LTV. It doesn't make financial sense to remortgage while you're unable to pay your lender's charges.
• Your LTV is really high and your house price has dropped. This is called evaporating equity, and it can quickly turn into negative equity if you end up owing more than you initially borrowed.
• If you have a high LTV (more than 90% of the value of your property) you may find it difficult to remortgage with a better rate.
• Your financial circumstances have changed. Every time you remortgage with a new lender, you need to do a fresh mortgage application. If the amount of money going into your household has diminished, lenders may no longer be willing to lend to you.
• You're close to paying off your mortgage and there's no point remortgaging because the fees outweigh the savings. Indeed, lenders aren't willing to lend to those with mortgages below a certain amount.

Which mortgage should I choose?

If the BOE base rate is low, you'll have a lot of deals to choose from when you remortgage. When the base rate is high, the number of deals dry up, leaving only packages with poor terms.

Let's take a closer look at the types of packages that might be available to you when the time comes to switch:

Fixed rate remortgage deals

Over 75% of borrowers are on a fixed rate package. That doesn't mean they're necessarily better than variable rate mortgages, but it does speak to their perceived benefits of security and exclusivity.

Fixed rate features

• Pay a predetermined interest rate for a specific set of time.
• Interest is fixed but can be high or low depending on the state of market at the start date.
• Competitive rates that dry up fast when the market shifts.
• Usually allow for 10% overpayment per annum.
• Most common variants are either two or five year fixed rate mortgage(s).
• Generally charge ERCs if you switch before the end of a fixed period.
• Expect administrational fees and exit fees when you remortgage.

Should I choose a two year or five year fixed rate?

As mentioned, the most common duration of fixed rate mortgage is two or five years. But which one provides the best value for money?

The answer is that it totally depends on how the market unfolds - and that's something no one can ever truly predict.

On average, five year fixed mortgages tend to have a higher rate of interest than two year fixes. This makes sense. You pay more for the benefit of security, and with your mortgage rate locked in, you won't have to worry about market turbulence for half a decade.

For some homeowners however, the average 1.5% difference in interest is enough of a turn off. What's more, if interest rates end up falling, you could be stuck paying the higher rate.

With a two year fixed mortgage you'll have less security than a five year fix, but you'll also have an opportunity to take advantage of potentially low market rates.

To decide between a two year and five year fixed rate, assess historic interest rates and work out where you fall in the midst of things. If rates are at a historic low (as they were earlier this year), it's probably best to strike out on a five-year fix that reflects the low rate of interest.

But if rates are changing and the future looks uncertain, you may want to lock in a competitive two-year fix to give yourself breathing room to change in the future.

Tracker remortgage deals

Trackers are the most common type of variable rate mortgage in the UK. They're usually available as either a five year or lifetime (duration of mortgage) package.

Tracker features

• With a variable rate mortgage, you pay a rate of interest consistent with the Bank of England's base rate.
• Interest can be high or low depending on the state of the market.
• Trackers are not as competitive as other incentive rates.
• Some trackers have collars and caps - in other words, the lenders can stop you from paying too much interest and prevent you benefitting from super low rates.
• Some lifetime trackers allow for uncapped overpayments, but most lenders charge ERCs as with standard fixed rate deals.
• Most common variants are five year and lifetime trackers, with five year trackers locking you into the lender's rate for five years, and lifetime trackers lasting the remainder of the mortgage.
• Expect administrational fees and exit fees when you remortgage.

Should I choose a lifetime or five year tracker?

While there are benefits to both, your choice of tracker should be wholly dependent on the forecast for interest rates.

Mortgage rates have been stunted since 2015, reaching historic lows in the first quarter of 2022. As of September 2022 however, they are back on the rise, and at breakneck speed. With the Bank of England base rate set to increase to 6% in 2023, signing up to a tracker mortgage, regardless of its duration, could be risky.

Despite this, there are clear benefits to the two common types of tracker.

No remortgaging or exit fees with a lifetime tracker

While you are vulnerable to the fluctuations of interest rates with a lifetime package, you will benefit from the absence of remortgaging fees. Because your mortgage covers its entire duration, exit costs, administration and conveyancing fees are no longer an expectation as you don't have to remortgage.

More flexibility with a five-year tracker

On the other hand, a well-timed five-year tracker could allow you to take advantage of low interest rates, and then give you the opportunity to fix your mortgage at the end of the five year period.

Fixed or tracker mortgage?

Ultimately, the choice between remortgaging to a fixed or tracker mortgage comes down to your appetite for risk and whether you can afford the financial consequences.

A fixed rate deal carries with it a level of security. Your monthly payments are fixed and you don't need to worry about rising interest rates.

However, lenders design fixed rate deals to be competitive with what they speculate the BOE base rate will eventually be. In other words, you might be spending more money in the short term with a fixed deal, but you'll be protected if rates rise. But if the base rate falls, you'll be locked into your deal, and you'll need to pay an Early Repayment Charge to make an early exit.

A tracker mortgage on the other hand, is dictated solely by the whims of the lender and the current BOE base rate. Your monthly repayments will change every month based on their projections.

This could be sensible if interest rates are projected to be low. But if rates rise, so will your monthly repayments. This makes a tracker mortgage a bit of a gamble - but if you think you can predict the turbulence of the market, it might be worth it.

In summary...

Remortgaging to a fixed rate mortgage can be seen as a risk-averse choice as it locks you into a specific rate of interest. A tracker mortgage follows the BOE base rate, which means the amount you pay will change each month. This makes a tracker riskier than a fixed rate mortgage, but you will immediately benefit when there are lower rates.

With regards to deciding on the duration of your mortgage - it depends. A one year fix over a period of five years could be better value than a five year fix. Assess your financial situation and do your research, but above all else, consult a mortgage broker and make the best decision you can.

Base your choice on affordability

Ultimately, no one can predict what the future may hold, and while hindsight is a wonderful thing, no one can truly say which way the market is going.

If you are going to remortgage, just make sure you can afford it. While it could save you a lot of money, it can also cost you a lot of money, especially if you're unprepared for exit fees.