Should You Refinance Your Mortgage Post-COVID?
It’s no secret that the current COVID-19 crisis has had a tremendous impact on people’s financial well-being. Subsequently, one of the direct impacts was on mortgage payments. At the height of the coronavirus spread, nearly one in six homeowners in the UK chose to make payment deferrals on their mortgages.
Now, with the pandemic slowing down and the advent of vaccines, thousands of borrowers are having a relook at their existing mortgages. A mortgage is the greatest financial debt on households. As such, remortgaging could really be a life-saver helping you save thousands of pounds in additional interest every year.
Another positive outlook is the fact that mortgage approvals in the UK hit a new high with almost 100,000 loans being approved by lenders in October, which is the highest since September 2007. This goes to show that the market is certainly stabilizing and a lot of trust is being shown by lenders.
You can get an opportunity to save a lot of money by streamlining your largest financial debt. If a drop of even one percent matters to you and allows saving money on your mortgage, you should not miss this chance. A borrower must understand the pros and cons of remortgaging post-COVID.
6 Situations When Remortgaging Benefits You
With remortgaging, you get an opportunity to save money. There are several reasons for a remortgage plan to work for you –
1. Your discount mortgage term is going to end
Discount mortgage plans typically vary from two to five years. With such mortgages, borrowers can avail special discounted variable rates for a short period. As soon as the term ends, the lender starts charging a standard variable rate that is higher than your old interest rate. Hence, the borrower should look for the best deals within 14 weeks before your discount term ends.
2. Lower interest rate
If you have already mortgaged your property at a higher rate of interest, it is wiser to look for cheaper options to save money in the long run. However, even before you remortgage, you need to take into account the admin fees and prepayment charges. Even after paying such charges for prepayment, you can still save a lot of money with a new deal with an attractive rate of interest.
3. Capital appreciation
Property rates appreciate with time. Nonetheless, if the property rates have rapidly gone up after the closure of the mortgage plan, you become eligible for a higher amount with a lower rate of interest, which makes perfect sense to remortgage.
4. Interest rates may increase in the future
It is important to understand how interest rates go up and down. The interest rate charged on your mortgage scheme depends upon the base rate of the Bank of England. If the base rate is about to rise, it would affect your mortgage payments. However, you could secure a competitive interest rate with a remortgage plan thereby saving thousands of pounds.
5. Borrow more
The need for funds can arise anytime, and the current pandemic doesn’t make things easier. If your current lender is not lending you more, you can remortgage with a new lender to raise money at cheaper rates which could be used for other purposes.
6. Reduce loan size
When your current scheme does not let you overpay, remortgage allows you to reduce loan size at lower rates. Just ensure that you do not pay very high prepayment charges.
Understanding the cost of switching
Whether you should remortgage or not depends upon the cost of switching and how does it impact your outstanding mortgage. For example, if you have a loan amount of £175,000 for a term of 20 years at an interest of 5%, the total interest charged would be £116,196 with a monthly installment of £1,155. The total cost of the mortgage would turn out to be £291,196.
But, if you wish to remortgage at 3%, you may have to pay an arrangement fee of around £2,000 that would be added to the mortgage. The total interest charged over 20 years would be £97,824 with a monthly installment of £982. However, in this case, the total mortgage you’d be paying over a 20-year term would be £274,824, which means you would save £16,372 over the term.
In the given example, the benefits of switching are clearly visible. It is wise to calculate the costs of switching by taking into account the prepayment charges, arrangement fees, and other such charges to see if it’s worth it.
Thankfully, you can use a mortgage calculator which does all the calculation for you. All you need to do is input the variables such as your mortgage amount, rate of interest, and the term, and you get a detailed breakdown of mortgage payments along with a clear separation between principal and interest charged every month.