Remortgage Applications Surge Before The Interest Rate Rise Lands In Late 2011
Whilst interest rates have been at their record low of 0.5 per cent since spring 2009, speculation is rife that the Bank of England will raise rates in the near future. “Bank rates cannot stay at this level indefinitely”, said Governor of the Bank of England Mervyn King in May 2011, adding “at some point it [the Base rate] will return to more normal levels.”
The Bank of England’s decision to leave rates well alone in the first quarter of the year were down to figures showing that the recovery of the UK financial markets was sluggish and the increase would have slowed it further.
What Does This Mean for Mortgage Borrowers? An increase in the Bank of England Base rate will have an impact on homeowners who currently have a discounted, tracker or variable rate mortgage. Variable rates are those which are either linked directly to the Bank of England base rate or are controlled and reviewed regularly by the lender. Most variable rates move up and down as and when the Base rate changes.
Considering many people are enjoying the benefit of low repayments since the Base rate reached its record low in 2009, any increase in their monthly outgoings may hit them hard.
An increase in the Base rate of just 0.5 per cent (to 1 per cent) would result in a £62 increase on a £150,000 ‘interest only’ mortgage. With inflation over 4 per cent and the cost of many other essential purchases rising sharply, finding an extra £750 a year to repay their mortgage could be tough for thousands of households.
Today, almost 60 percent of borrowers have either variable or tracker rate mortgages, so of course increases in interest rates would affect all of these people. The news of an increase later in the year has caused a surge in remortgages in order to fix costs in the future.
Latest Evidence Shows Many are Reacting by Remortgaging: The number of remortgage approvals in the UK has risen in the early part of 2011 as more and more people look to switch their home loan. Figures from the lender’s organisation the Council of Mortgage Lenders (CML) have shown that the number of remortgages increased by 16 per cent between February and March this year, reaching 33,900.
The rise in remortgage approvals – the figures are up year on year – has been attributed to the prospect of an increase to the Bank of England Base rate. The CML said: “The huge rise in remortgage activity is likely to be linked to the expectations of an increase in interest rates.”
Many of the remortgage deals being agreed are on fixed rate products. With an estimated eight million households currently on a variable rate mortgage, increasing numbers are looking for the security of a fixed rate remortgage deal to protect them against future interest rate rises.
The benefit of a fixed rate mortgage is that the interest rate remains at a fixed level for the entire life of the deal and so monthly repayments remain the consistent. This is a clear incentive for those borrowing to change to a product where they can plan repayments with a degree of predictability in these turbulent economic times.
Timothy Frodsham writes for JustRemortgages.com one of the UK’s top sites for the latest remortgage rates and best remortgage deals.