The uncertainty of Brexit
Trying to sell your house is a no-man’s land of uncertainty.Emotionally, you begin to distance yourself from your current house as you begin to imagine yourself in a new home. But you can’t get too carried away with your future dreams too quickly because you have no idea how long it will take to find the right buyer and the perfect new property – and for these two events to align so that your sale and purchase proceed in tandem.
Alongside the emotional uncertainty can be practical and financial uncertainty; it’s hard to be precise about your future forecasting as you don’t know how much you are going to get for your current home and how much you may end up paying for your next property. And, crucially, you don’t know how long you might live in this limbo.
Anecdotally, many people trying to sell their homes at the moment say the level of uncertainty is higher than ever, as the ongoing Brexit saga is making some prospective home buyers more nervous than they might otherwise be.The impact on the Tunbridge Wells housing market is varied, but some properties are definitely staying on the market for longer than might normally be anticipated.
The costs of moving to the standard variable rate
When you don’t know quite what the future holds, it’s important to keep your options as open as possible, so that when you do find both a buyer for your current property and your ideal future home, you have as few hurdles as possible to make your dreams a reality. You also want to keep your costs down, so you have as much money as possible to fund your dream home, whether that’s more money to put into the deposit or to pay for renovations when you move in.
If the fixed term on your current mortgage is coming to an end, you may therefore think that it makes sense to accept moving to the standard variable rate rather than incurring the fees usually associated with arranging another mortgage and potential early repayment penalties. However, returning to the standard variable rate is likely to increase your monthly repayments considerably; if your house ends up being on the market for a while, this could soon mount up
If you’re aiming to sell your current property, any new mortgage needs to give you flexibility and be cost-effective, as you know you will be taking out a new mortgage when you move. Fortunately, there are residential mortgages on the market that don’t have any fees (no valuation, arrangement or solicitor’s fees) and that come without penalties.
These products offer variable rates, whereas most people tend to go for fixed-rate mortgages, so you are trading certainty for flexibility. But, crucially, the variable rate should be lower than the standard variable rate, so you should save money. The variable rate that you are offered will be in part determined by your loan to value ratio (the value of your mortgage compared to the value of your property).But if your house is on the market for several months, remortgaging to a new variable-rate mortgage could save you quite a lot of money.
Quite how much money remortgaging on a variable rate mortgage is going to save you will depend on the size of your mortgage and the variable interest rate you are offered. But our hypothetical example shows how significant potential savings could be:
Laura and Miles have a £500,000 mortgage over 25 years, which is about to return to the standard variable rate of 5%.This would take their monthly repayments to £2,924.If they were to remortgage on a short-term basis on a variable rate currently at 2%, their monthly repayments would be £2,120, saving them £804 per month.If their variable rate remains at 2%, in six months they would save £4,824 – which could be very helpful when they come to move.
Of course, if interest rates rise, Miles and Laura’s monthly payments would go up, but they would still typically be lower than if they stuck with their current mortgage on the standard variable rate. And with no fees or penalties associated with their new mortgage, the maths make sense.
When to consider short-term remortgaging
There are three key times when we would recommend considering a short-term remortgage:
- If you are trying to sell your house and have come to the end of term on your existing mortgage.
- If you have owned your home for a while and want to renovate – short-term remortgaging could be the solution to enable you to raise the capital you need to carry out the renovations. You can then remortgage on a fixed-term mortgage when you have finished the renovations and your property is worth more
- If you are renovating to sell.
Although we have called this short-term remortgaging as it’s a strategy to consider when you expect your circumstances to change and don’t want to be tied into a long contract with associated fees and penalties, it’s important to understand that ‘short term’ could mean several months or even a couple of years. But if you intend to stay put, strategically it is probably sensible to look at fixed-rate mortgages, as these are generally more cost effective in the longer term, even when you factor in the fees.