Homeowners Encouraged to Heed Advice of Experts to Remortgage Shop to Save Money

Homeowners Encouraged to Heed Advice of Experts to Remortgage Shop to Save Money

Evidence of the rise in property values has been revealed as the total value of UK housing stock reached a record high of £8.7 trillion in 2022 according to data released from Savills. However, the value increase to 2022 was smaller at only 5% than had been recorded in the previous two years. This could be a sign of a future decline in the market and it is likely to occur this year. 

The expectation of a loss in property values is being blamed on the rise in mortgage costs. 

The Bank of England’s Monetary Policy Committee (MPC) has responded aggressively to growing inflation and began increasing the standard base interest rate in December 2021. The rate had remained at an all time historic low for the Bank at 0.1%. It rose from it’s almost zero level to 0.25% in the first increase after it had been lowered in response to economic strains caused by the global pandemic.

After the first increase at the end of 2021, the MPC went on to increase the base rate during the next nine consecutive meetings. In February 2023, the rate reached a high not seen in over a decade at 4.0% as inflation had reached a high not seen in 40 years.

Not only are consumers dealing with inflation, but as a result must endure higher interest rates which in turn makes borrowing more expensive at a time when cheap borrowing is most needed. It is a financial loop in which consumers have little relief  and must endure the strains until recovery is in place.

This is particularly true for those that hold high value loans, such as mortgages held by homeowners. There is a concern that the many homeowners coming to the end of their mortgage term this year will face financial shock with higher repayments. This is because many could have obtained their current deal during the time the base rate was at an historic low and lenders were offering their own record low interest rate deals.

Those that do come to the end of their mortgage term will have to chose between a remortgage or allow their lender to move them to the lender’s standard variable rate (SVR). It is usually a better strategy to remortgage. Not only could a lower interest rate be found, but a fixed rate remortgage could be chosen to shield the homeowner from further rate hikes.

The MPC is expected to increase the rate again during their meeting in March. 

Concerns of declining property values is being included in warnings to homeowners to consider shopping for a remortgage. Doing so could lead to saving money by avoiding higher rates such as connected to a SVR and getting a fixed rate to avoid paying more than necessary as rates are increased. It could be particularly beneficial to remortgage before property rates decline. If property values decrease below the level of the debt owed on a property, the homeowner will have entered negativity equity and will be out of reach of a helpful remortgage opportunity.

Getting the security of a remortgage now instead of waiting could give the homeowner the relief needed to avoid paying out more, allow locking in a fixed rate, and dismissing concerns of negative equity keeping one from getting an affordable rate. 

One must also be mindful of what deals are available to them in relation to their property value. The loan to value ratio is a consideration of lenders when offering a remortgage deal to a homeowner. The higher the property value in comparison to the amount borrowed in the loan determines risk for the lender and thus which remortgage deals are offered to the homeowner. The greater the property value in comparison to the value borrowed opens the door to the best remortgage offers.

Remortgaging before property values decline could be a smart strategy.

Lucian Cook the residential research head with Savills, remarked, “The growth in house prices over the past three years has added considerably to the paper wealth of homeowners, driven in no small part by the well-documented ‘race for space’ over the period.

“Though mortgage borrowing equates to less than a fifth of the nation’s housing stock value, the cost and availability of that debt will be crucial to the shape of the housing market over the next four or five years. Recent figures from HMRC indicate that buying activity peaks among those in their 30s, with the under 45s accounting for 59% of all purchases.

“Combined with the prospect of lower levels of house building, we expect that 2022 will represent a high watermark for the value of the nation’s housing stock for a few years.”

Mr. Cook added, “The total value of all housing has risen by almost a quarter (23%) since 2019, while outstanding mortgage debt went up by a lower 11%. So, while outstanding borrowing increased by £168bn, the growth in the total equity pot was well over nine times that figure at £1.46tn.

“Not only have we continued to see people who benefitted from the homeownership boom of the latter part of the 20th century joining the ranks of the mortgage-free, but there’s also been a modest recovery in numbers of mortgaged homeowners, due to increased levels of first-time buyer activity over the period.

“At the same time, however, we’ve seen pressure on privately rented housing stock levels, due to increased regulation and taxation despite rising tenant demand. As a result, growth in the total value of mortgaged owner-occupied homes exceeded that seen across the private rented sector, reversing a trend over the previous five years.”

All signs point to a housing market that could be losing the attention of hopeful homebuyers as the economy remains somewhat unpredictable and experts await the results of the MPC rate hikes against growing inflation. 

As mentioned, the next MPC meeting is days away, and with it could come another rate increase which takes the cost of borrowing to a level not experienced by many homeowners. Rather than be caught unaware, homeowners should consider the advice of experts and shop for a remortgage soon rather than wait out an unpredictable economy and miss out on keeping more money in their household budget.

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