Remortgage now or regret it

You may be reaping the rewards of a low variable rate now, but what would you do if your repayments shot up?

Before the credit crunch borrowers were actively encouraged to remortgage when they came to the end of a short-term deal. If you had a two-year fixed rate, for example, it made sense to shop around just before the end of that period and jump to another fixed rate or tracker offer. If not, you reverted to your lender’s dreaded standard variable rate (SVR), most of which were relatively expensive and therefore unattractive.

Savvy mortgagors never languished on these SVRs, preferring to switch and save every few years.

But then the normal rules of mortgage borrowing were turned upside down when the Bank of England reduced its Base Rate to a record low of 0.5% in March 2009. Many lenders reduced their SVRs in turn, and suddenly doing nothing at the end of your deal and simply moving onto this reversionary rate became very attractive indeed.

Sticking put

Since last spring many borrowers have forgotten about remortgaging and just sat on their lender’s SVR, enjoying extremely low mortgage repayments. After all, why go through the hassle of switching, and the cost of paying an arrangement fee to your new lender, when the new deals on offer were less attractive than your SVR?

This ‘educated apathy’ has continued for 18 months and served many borrowers extremely well. Every time the Bank of England votes to maintain Base Rate at 0.5% for another month, variable rate borrowers get another stay of execution on their low rates.

But how long can this situation last? And is it now time for borrowers to consider remortgaging before rates rise and new deals become less attractive.

The time is now

The danger of sitting on your lender’s SVR is that it is likely to rise in response to an increase in the Bank of England Base Rate. Unfortunately nobody knows when Base Rate will rise, not even the financial experts that make the decision, because their opinions are influenced by the most up-to-date economic indicators.

However, while some experts are expecting an imminent rise, the current consensus of leading economists is that Base Rate is set to stay low for the foreseeable future, and perhaps until the middle of next year.

Of course, there are no guarantees that it won’t be increased before then, plus nobody really knows how quickly Base Rate will rise once it is increased for the first time.

You may be able to manage an increase of 0.25%, but what if the Bank of England hiked rates by 3% over a six-month period? That could mean a steep rise in monthly repayments for borrowers on a variable or tracker rate mortgage.

Remember there is no cap as to high how the Bank of England can raise its Base Rate -- the medium term trend is around 5%, far higher than its current level.

‘So what?’ you may say. After all, you might be planning on making the most of low interest rates now, and intending to wait until the first hike in Base Rate before jumping to the safety of a fixed rate mortgage.

That would be the savvy option wouldn’t it?

Well perhaps not.

Get in now

The problem is that the markets factor in expected changes to rates well in advance, and as soon as it becomes likely that Base Rate could rise, lenders will have priced this into their new deals. In other words fixed rates are likely to go up before Base Rate does.

Because of this there is a strong argument for actually making the switch to a fixed rate now. Unless you have a crystal ball, it’s unlikely that timing your move to perfection will succeed. Lenders will undoubtedly err on the side of caution, upping their fixed rates at the mere sniff of a rate rise.

Worst case scenario is that your SVR rises to a level you can’t afford and all the new deals on offer are much more expensive than current levels and therefore uncompetitive. This is bad enough, but imagine if house prices also start to slide, as many fear they could. You could be left with less equity in your property, which would leave you with fewer remortgage options, as lenders require at least 25% equity for their best deals.

Of course these are all maybes, but a combination of rising rates and falling house prices could be a perfect storm, leaving you with an unaffordable mortgage that you are unable to switch from. So it could pay to be ahead of the game even if you have to make a small sacrifice now.

If you switch to a fixed rate now you are likely to pay a bit more on your mortgage for the next few months, maybe until next summer. But if you can swallow that short-term pain, you could see a longer term gain.

How low can they go?

In the summer months the cost of fixed rates plummeted, with two-year deals falling to their lowest level in seven years, according to financial information provider Moneyfacts. They’ve edged up a tiny bit since, but are still extremely low, and that doesn’t just go for two-year fixes but five-year deals too.

Related blog post

• John Fitzsimons writes:

  Should you get a fixed rate or a tracker?

  With interest rates languishing at record lows, is now the time to take advantage with a tracker, or go for the safe option of a fixed rate?

  Read this post

So, how much lower can fixed rate mortgages go?

The answer is probably not much, if at all. This could well be the trough for fixed rates so if you are thinking of locking into a deal in the future, you could be better off just biting the bullet and making the switch now.

Aside from possibly benefitting from the cheapest fixed rate mortgages in a long time, you will also give yourself guaranteed protection against rising rates, meaning you can budget effectively. Of course the longer you fix for the longer you will get this peace of mind.

If you are considering switching to a fixed rate mortgage, below are some of the best:

15 fab fixed rate remortgages

More: New rules will push up your mortgage rate! | You'd be mad to ignore 2.19% tracker mortgages!