In the next twelve months an increase in the base rate of interest is highly likely. Rising house prices caused by the government’s Help To Buy scheme have reached levels that are causing alarm at the Bank of England and a rate rise is the only measure that can slow them down.
Home owners may be considering remortgaging in the coming year before rates rise, and this article is a quick guide to help borrowers think about how to get the best deals they can.
One motivation for getting a new mortgage is for locking in a low fixed rate for the next five years. The lowest APR (annual Percentage Rate) twelve months ago was at an astonishing low of 2.5%.
Deals like that are unlikely to come round again soon as interest rates eventually start to rise, but offers of under 3 percent are currently available.
Loan to Value
The rate you are offered will be based on the degree of risk your home loan presents to the lender, amongst other criteria.
Lenders calculate the degree of risk based on the size of the loan compared to the size of the mortgage.
If you are buying a £100,000 property and you can cover the first £50,000 yourself or with help from family members, you will need to borrow £50,000.
This means your Loan To Value (LTV) ratio is 0.5, and the closer the LTV is to one, the higher the risk and the rate of interest will rise accordingly.
Everything you can possibly do to bring the LTV down will help as it will make you more attractive to lenders, save you money in the long run, and put you on a much more stable financial footing in your new home.
The New Lending World
If you haven’t been to see a mortgage advisor in a few years, you’ll notice a big difference as the rules surrounding borrowing have become far stricter since April this year.
The horror stories of irresponsible lending before the 2008 crash, combined with the government’s massive help to home owners with Help To Buy have led regulators to impose stringent new borrowing rules.
Expect your mortgage advisor to want to see your entire financial history, bank records, confirmation of employment, savings, credit reports and more.
Pay off any outstanding debt, even if it’s just £50 on a store card, any black marks on your credit score could be potentially fatal when it comes to securing a lending decision.
In Britain there are, in general, three types of mortgage deal commonly available, and these are fixed rate, variable rate and tracker mortgages.
A fixed rate mortgage offers borrowers a degree of security, it means that if the base rate of interest rises in the future, the lender will continue to offer the rate that was set and that offer will typically run for five years. It is a way of future-proofing your mortgage against sudden and unexpected mortgage rises and typically most people choose them.
Variable rates have been popular in the last five years. Whereas fixed rates are ‘fixed’ at higher levels to enable the lender to get as much out of the deal as the borrower (arguably more), a variable rate simply responds to the Bank of England’s base rate of interest.
When the base rate is low your mortgage is cheap, and when the rate is high, it’s more expensive. Rates have been half of one percent for six years but this is likely to end soon, leaving many variable rate borrowers seeking fixed rates.
A tracker mortgage is similar to a variable rate mortgage, as it follows the base rate set by the Bank of England but at agreed set margin (perhaps one percent), meaning that a one percent rise in the base rate will not result in a three or four percent rise from your high street lender.
If you’ve already got a mortgage and you are thinking about protecting your wealth against future changes in the economy it is important to see this as part of your long term financial strategy.
If you are unsure about what next steps to take with your remortgage or would like to speak to an advisor, please don’t hesitate to contact us.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. SECURING SHORT TERM DEBTS AGAINST YOUR HOME COULD INCREASE THE TERM OVER WHICH THEY ARE PAID AND THEREFORE INCREASE THE OVERALL AMOUNT PAYABLE. YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU REMORTGAGE.