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Remortgaging After A Rise In Interest Rates

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Does a rise in interest rates increase incentive to remortgage

In the UK the Bank of England recently increased interest rates to 5.25%; this is the third rise since last summer. The effect of this is to increase substantially the cost of mortgage interest payment for those with variable or tracker mortgages. For example if you have a £150,000 mortgage a quarter point rise will add £43 on to a 30 year mortgage. With the rise in variable mortgage many homeowners are seeking to get a fixed rate deal. The advantage of a fixed rate deal is that you will be insulated against any further rate rises and thus it can make financial planning easier and more stable. However the big bank lenders have already started to review their fixed rate deals and they are increasing the interest rates on their fixed rate deals accordingly.

A key feature on the relative merits of a fixed rate mortgage is the extent to which interest rates are likely to rise further. To a large extent your guess is as good as anybody else’s. A lot depends upon the future trends of inflation and interest rates. If the recent rise in inflation was an unexpected one off, (mostly it was due to higher taxes and energy prices) then there may be little need for future interest rate rises. If this is the case a variable or tracker mortgage may offer a better deal. On the other hand the UK economy is quite buoyant; in the last year it grew by 3% and is forecast to grow by 3% in 2007 and 2008. 3% is slightly higher than the UK’s long run trend rate of growth and therefore could be inflationary in future years. Inflation could be a particular problem especially if there are continued rises in commodity prices due to the fast economic growth in China and India. If you are to get a fixed rate mortgage it is probably advisable to go for a longer term period of 4 years. This gives you the advantage of having stability in your interest payments for a long time.

If you are considering a remortgage the first port of call should be your existing mortgage lender. These days before switching your mortgage to another bank or building society it is always worth asking your existing lender to see whether they can give you a better deal. In recent years there has been an increasing tendency for financial institutions to try and hold on to their existing mortgage holders. It is likely your current lender is now willing to give you the same preferential treatment as they might to a new customer or someone who is Remortgaging. The advantage of sticking with your existing lender is that you are much more likely to avoid high penalty charges and administration costs. With regard to fees, there has also been a pattern that these have become more costly. This is to make it more difficult to switch from your account.


About the Author

Richard Pettinger studied Politics and Economics at Lady Margaret Hall, Oxford University. He now works as an economics teacher in Oxford. He enjoys writing essays on Economic and he edits an Economics Blog focused on UK and US economies: http://www.economicshelp.org/econ.html


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Article Published/Sorted/Amended on Scopulus 2007-04-07 15:28:26 in Business Articles

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