There’s been much discussion about historically low UK base rates over the last seven years in light of the US mortgage crisis which led to the worldwide economic collapse. Official figures in the UK suggest that more and more people are now looking to remortgage and lock in lower interest rates, which on the surface makes perfect sense. However, are there any potential pitfalls you should be aware of when looking to remortgage?
Many mortgage companies will implement an array of costs when looking to remortgage and you should be fully aware of these from day one. While the government has cracked down on penalties for those looking to repay their mortgages early you need to be aware of any additional costs in this area as well as set-up costs for a new mortgage. In some cases it is easy to be blinded by the potential savings from lower interest rates and fail to consider any other additional costs involved.
Maintaining your current mortgage liability
The vast majority of homeowners in the UK will have seen an increase in the value of their property over the last few years and will likely be able to remortgage for a higher amount – well in theory. There are two factors to consider here, at the end of the day you will still need to repay your mortgage so increasing your liability in the longer term (potential extending your repayment period) may not always be the best thing to do. Secondly, even though you are remortgaging you will still need to pass the relevant affordability tests introduced by the authorities.
Interest only mortgages
If you have an interest only mortgage, where you pay the interest going forwards and repay the original loan at the end of the period, the ability to immediately reduce your interest payments is very attractive. Even if you are only able to lock in a short to medium term reduced interest charge this is all money that you can save. While there is the potential issue of increased interest charges in the future the fact is that you would still be exposed to these with your original mortgage arrangement.
While repayment mortgages, where you payback interest and a slice of the outstanding original loan each month, were often ignored by homeowners in the boom times in favour of interest only mortgages, the situation has changed dramatically over the last 20 years or so. The ability to reduce your interest payments in the short to medium term, with any savings welcome, has led to many people looking to remortgage and rearrange their finances. There is always the risk of increased interest charges in the longer term but again this risk is just as relevant to your original mortgage – maybe any interest payment savings could be ploughed into additional loan capital repayments?
The ability to reduce your interest charges even in the short to medium term should be considered against any additional charges with the remortgaging process. If there are still significant savings to be made then it is worthwhile taking professional financial advice about your situation. The only potential issue is for those tempted to remortgage at a higher level because their property may well have increased in value. This may well raise them additional capital in the short term but at the end of the day this will still need to be repaid.
Also, do not forget that all mortgage arrangements are now tested under the affordability principle.