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The Rising Cost Of Remortgaging

Apr 1, 2008
As hundreds of thousands of UK home owners reach the end of the discount period on their fixed interest home loans most will look to remortgage to a new product some time this year. Only a few months go it seemed likely that most borrowers in this situation would opt for another short term fixed rate deal, however the credit crunch has changed the situation.

It is estimated that nearly one and a half million fixed rate mortgages will reach the end of their discount period this year. Several years ago mortgages with short term discount periods and low entry fees were on offer from many different UK lenders and home owners were all too happy to borrow on such terms. Since then, however, the credit crunch has forced lenders to borrow money at higher interest rates and they are now required to pass the cost on to their customers in order to protect their profit margins.

The fierce competition in the mortgage market has lead to a situation in which lenders cannot simply increase their interest rates and expect home owners to remortgage to their products. Instead, lenders keep their rates low and require that borrowers pay high entry and exit fees when applying for or redeeming their home loans. Because of the high entry fees, short term deals no longer seem attractive to borrowers as they do not get value for money as the discounted interest rate period may expire in only two years time. When a borrower pays an arrangement fee in excess of a thousand pounds they would need at least three or four years to recoup the money by way of savings on interest payments.

In addition to high entry fees acting as a barrier to people remortgaging to short term home loans, most products in this category also offer borrowers a fixed interest rate for an initial period. While this may have seemed attractive a few years ago, most analysts and home owners expect the base rate to fall in the short term meaning that fixing the interest rate may not be the best option. Many UK home owners are therefore content to remortgage to a product with a variable interest rate that tracks the Bank of England Base Rate.

These two factors combined have lead to a situation in which the short term, discounted, fixed interest rate products that were so popular in the mid-2000s are no longer in favour. The one and a half million home owners who will be due to remortgage their home loan this year will therefore be hunting for a different style of mortgage which suits the current economic climate. Lenders are aware of the situation and are offering more favourable variable rate products than they were previously with lower margins on their tracker interest rates and acceptable entry fees.

Home owners who are looking to remortgage in the near future should therefore conduct extensive research into current conditions in the UK mortgage market before deciding on a product to remortgage to. The market may have changed substantially since the last time they remortgaged their home.
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