Remortgaging a Home Credit Deal
Most homeowners in the UK bought their home with a good down payment but to save money chose one of the many adjustable rate mortgages available. For the most part, they knew what they were getting into: they get an excellent interest rate and wonderfully low payments for the first year or two, then the payments vary, based on some higher lending institution’s prime rate. The prime rates for the past few years have been unprecedentedly low and seem to being staying steady at their current levels.
The reason why an ARM loan can offer such low introductory payment is because the lender knows that they will never be losing money on the home credit deal. If the prime rate goes up, they will be able to charge a higher interest rate after the initial fixed rate term ends. Fixed rate mortgages, on the other hand, cannot offer such a low rate because the lenders have to take into consideration the possibility that the rate could, and likely will, go up. The best rate a homeowner can get is the best guess as to what the average interest rate is going to be over the next fifteen to thirty years, depending on the mortgage term.
Because of the popularity of adjustable rate mortgages in the UK, the popularity of remortgages is quite high as well. For the homeowner who has an adjustable mortgage, a remortgage is a chance to start over every few years with the best interest rates available. By remortgaging, the homeowner can lock in the one, two or five years of guaranteed low interest rates and hope that rates stay low during that time. There is a bit of a gamble involved when choosing an adjustable rate mortgage, whether with the intention to continue paying on it or with the intention of remortgaging when the fixed rate term expires.
While interest rates stay low, they are an excellent option, however if interest rates climb, the payments for the loan, when the adjustable rate comes into play, can go up in a dramatic and budget destroying manner. At that point, a remortgage can possibly offer some relief but depending on how much the rates go up, the relief may not be all that much and may have to come in the form of a fixed rate, fifteen or thirty year loan.
Right now, with the rates so low and with there really being no way for them to go but up, a fixed rate remortgage might be the best home credit deal available. While the payment may be a little higher, there are some really good fixed rate remortgages available in the UK today that take advantage of the really low interest rates that are currently available and pass on most of the savings to customers. The difference could be less than one percentage point between a good adjustable rate mortgage and a fixed rate mortgage in some cases. The security of knowing exactly what the payment will be on a mortgage for the entire life of the mortgage will easily make up for the slightly higher payments today and the potential savings later on when, not if, the prime interest rates start to go back up after the economy more fully recovers.
That said, the other reason why Adjustable Rate Mortgages are popular in the UK is because many homeowners are perpetually moving. Whether it is across the street to a bigger house or from London to Glasgow in the pursuit of a better job, UK residents are very mobile. The typical homeowner in the UK only stays in their home an average of three to four years. For the homeowner, it makes the most sense to secure the lowest payment possible so they can use any extra money to improve the home so when they go to sell they can maximize the returns.
For many across the UK, the fixed rate mortgage is looked upon as the retirement mortgage for when it’s time to settle down and stay in one place for more than just a few years. While possibly foolhardy, assuming that the current home is not the last home as well as assuming that the next home or remortgage will be able to be had with the same interest rate as the current one, it is a very pervasive way of thinking.
However, there has been a trend to more long term home ownership simply due to the economy. Homeowners are realizing that moving every few years just to get into a slightly bigger home or one with better kitchen fixtures or other reason is not something that is fiscally responsible. Instead, many homeowners are staying longer and investing more in their current house to make it their dream home, rather than chasing down their dream home.
They are taking advantage of remortgages of their adjustable rate mortgage and while not going for the full fixed rate remortgage offerings, they are instead choosing longer term adjustable rate mortgages or remortgages that have five year fixed rate terms before the rate becomes adjustable and before another remortgage would be needed. This is a good balance for those hoping for a strong economic recovery and hoping for a slow increase in prime rates, which is fairly likely.
Those staying in their homes longer are also choosing to cash out some of the equity in their home when they remortgage as well so they can make improvements and transform their current home into their ideal home, not simply the stepping stone home they currently are in. Cash out remortgages can provide money for home improvements such as kitchen remodels, new flooring, bathroom renovations and even the addition of rooms in the home. All of these things will increase the value of the homes as well, making the next remortgage easier to secure or will help make the home sell easier and for a bigger profit.
For the homeowner, a remortgage is an excellent home credit deal. Either way they structure it, they will have extra money in their pocket to fix up the house or simply live a little better.