The mortgage market review led to the introduction of new mortgage rules. In very simple terms these rules obliged lenders to observe stricter mortgage lending practices. Buyers now need to prepared to demonstrate that they are capable of paying back mortgages over the very long term. This includes accounting for possible changes in personal circumstances. It also includes possible changes in interest rates. Realistically speaking any changes to interest rates could only be in one direction – upwards. With this in mind, buyers may like to look at the option of fixing the interest rate on their mortgage. This raises three questions and here are our thoughts on them.
Should I get a (new) mortgage at all? If you are currently renting are you sure you are ready and able to buy? You may be able to afford a mortgage, but are you absolutely certain it is the right choice for you in your current situation? Home ownership offers stability, but renting offers flexibility. Which are you likely to find more useful over the next 5+ years? If you are thinking about remortgaging your current home then it is important to understand that the answer to the question “How much can I borrow?” may have changed dramatically since last time. Assuming you can clear this hurdle, you will then need to ensure that you completely understand any and all costs associated with remortgaging your home. For example, do you need to have a new survey done? Then you need to do the sums to see whether or not remortgaging will save you money and if so how much. If switching is only a small gain, then only you can decide if it is worth the effort.
Should I look at a fixed-rate mortgage? While fixed-rate mortgages have the obvious attraction of stability, you need to look at your overall situation to decide whether or not they are right for you. Remember that there are three main types of mortgages: repayment, interest-only and offset. With repayment mortgages, you pay off both the sum borrowed and the interest. With interest-only mortgages you only pay off the interest on the loan and it is up to you to find a way to repay the sum borrowed at the end of the loan period. Offset mortgages are essentially massive overdrafts, which allow you to put in and take out money very flexibly. The basic idea is that you give up earning interest on your savings in order to pay less interest on your mortgage, thus gaining overall. In theory any of these options could be offered as fixed-rate. In practice you will need to see what is available on the market at the time you are looking to (re)mortgage. While the idea of fixing your rate may seem attractive, you may find that there are simply better deals out there at the time.
How long should I fix my rate for? If you are still in the market for a fixed-rate mortgage, you need to think about how long to fix the rate for. Again, the theoretical answer to this question may be very different to the practical one. While you might want to lock in a low rate for as long as possible, possibly the entire time of your mortgage, banks are businesses, which want to make a profit. With that in mind, you will need to look at each of the available deals and see what the overall cost is (including, for example, any set-up fees). You are also going to need to look at the situation after the fixed period comes to an end. In other words, will you still have a good deal or, realistically, could you find yourself either dealing with a poor mortgage or having to go through the remortgaging process and take the risk of being turned down? Your home may be repossessed if you do not keep up repayments on your mortgage. For Residential & Buy to Let Mortgages, our typically processing fee is £395 and we may receive commission from the lender.
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