Should You Remortgage?

Interest rates had already risen 12 times since December 2021, when the Bank of England (BoE) decided to increase them to 5% on 22 June 2023.

The latest 0.5% rise has significant implications for mortgage holders. Those currently on a fixed-rate deal may largely be insulated from further monthly increases to their repayments. Yet a reckoning may come when the deal ends. Those on a variable rate may see their costs rise.

Some traders are predicting that the base rate will rise to 6% by the end of the year. This raises the question – should you remortgage now, to avoid the possibility of further increases in your payments? Or, is it better to wait, perhaps until inflation and interest rates come down?

In this guide, we answer these questions directly in light of the latest economic data and insights from analysts. Please speak with a professional adviser for clarity in your own situation.

What will happen to mortgage rates in 2023?

If someone had a crystal ball to answer this question definitively, they would be a rich person!

It helps to examine where mortgage rates currently are, to help discern where they might end up. Following the September 2022 short-lived “Mini Budget”, mortgage rates saw some big rises which lead to an approximate 6% average for a 2-year deal at the end of the year.

Between March-May 2023, mortgage rates were trending down again. Yet recently in June, rates have risen to a 7-month high with the average rate on a 2-year fixed mortgage now 6.23%. This is largely due to a 0.5% rise in the BoE base rate.

Since mortgage rates are mainly determined by the BoE rate, it makes sense to ask how high the latter might go and when it might start to fall. Certain city economists forecast a peak of 5.5%, with other market analysts predicting 6% before the end of 2023.

Few are currently arguing that the base rate will remain the same or fall this year.

This is largely due to widespread expectations about the UK continuing to struggle with a stubborn inflation problem in the months ahead. In April 2023, inflation stood at 8.7% – the highest in the G7 alongside Italy.

Britain’s inflation problems are partly due to its high reliance on natural gas for heating homes – which are heavily influenced by global wholesale prices – and rising food prices (e.g. due to shortages of salad and vegetable imports because of poor weather in Morocco and Spain).

Currently, the BoE expects UK inflation to fall throughout this year and hopes to achieve its 2% target by the end of 2024. However, this is likely an optimistic projection and there is a good chance that the Bank will need to revise its forecast again.

Even if inflation falls as predicted, it is not certain how the BoE will react with the base rate. It may not immediately pull it down, possibly waiting a few months to check that a significant inflation fall is not merely temporary.

Should I remortgage now?

The answer to this question depends on your risk tolerance, your current financial situation (e.g. your existing fixed-rate deal) and your goals.

If you are nearing the end of your fixed-rate deal, one option is to simply revert to your bank’s standard variable rate (SVR). The average SVR in the UK right now is 8.25%.

So, if you are currently paying, say, a 3% rate on an existing 2-year fixed deal which is coming up for expiration this year, consider how a potential 5% jump (or more) might impact your finances.

If paying 8.25% would be too much for your budget to cope with, then it may be necessary to consider remortgaging to a new fixed-rate deal.

The best 2-year rates right now, in late July 2023, are around 5.94%. Yet getting near this rate will likely require a big deposit (e.g. 40%) and paying an up-front fee, such as £999.

Another option might be to remortgage onto a variable rate deal (e.g. a “tracker mortgage”), on the understanding that the BoE may raise the rates further in the coming months/years. At the end of the deal, rates may have fallen and it may be possible to snap up a cheaper deal.

If you are considering this idea, be careful to factor in any arrangement fees and penalties for early repayment. Calculate whether you are likely to save money, overall, based on different interest rate scenarios.

It is important to consider your current position. Do you have the luxury to wait and try and “time the market” with a new fixed-rate deal? Or, it is more important that you have certainty about what you will be paying for your mortgage over the next 2+ years?

Please get in touch if you want to discuss your mortgage options with a professional in light of the current interest rate climate.

The content in this article was correct on 26 July 2023.

You should not rely on this article to make important financial decisions.

Teachers Financial Planning offers independent financial advice on savings, pensions, investments, protection and mortgages for teachers and non-teachers. 

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