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Hedge Your Remortgage

Jun 11, 2008
What a great life it would be if we could predict future interest rates. Imagine being able to wait it out on your remortgage until such a time as interest rates dropped by several percentage points, just as you knew it would. While this scenario is better placed in a science fiction movie there is a way to bet on the future price of home finance and always come up a winner.

The basis of the scheme is to take advantage of the fact that most mortgages allow you to reserve an offer rather than utilise it right away. What this means is that if you are looking to remortgage your home sometime this year and you find a product that seems suitable, you can apply for the home loan and if accepted you do not necessarily need to take up the offer immediately and redeem your old mortgage.

Instead you can leave the offer on the table, so to speak, up to a specified time limit. This time limit will usually be stated in the mortgage offer documents and usually lasts for between three and six months. During this period of time it is possible that interest rates may rise or fall but because you have a formal offer of finance at a fixed point in time your offer will not be affected by any turbulence in the lending marketplace.

Mortgage offers are not legally binding contracts insofar as you are not bound to utilize it. You can, if you like, apply for another home loan with another lender while the offer is still open and go with the new product if it suits you better. While you may be wondering why everyone doesn't do this the answer is in the fact that it can be costly. Each mortgage application will require a separate valuation on the property in question which of course costs money.

However some valuations can be cheaper if they are on the same property and in a short space of time since the original valuation. This means that you can revalue the house in a few months when you are ready to take on the mortgage offer to appease the lender's appetite for knowing how much the property is currently worth. For a relatively small cost you can therefore hold out on the home loan offer and see what happens to interest rates over a few months.

A savvy home owner could therefore obtain an offer to remortgage their home in one month, hold out for a few months, and if interest rates drop discard the original mortgage offer and get a new one by paying another survey fee and applying for a new loan. If interest rates rise or stay the same, however, they can simply take up the offer they received several months ago at the same interest rate it was offered at and save money compared to everybody else who are applying for mortgages at the higher current rates.

By doing this the home owner is effectively hedging their bets and entering into a no-lose situation. The main thing to keep in mind is that a second valuation fee will probably be incurred and if a new product is required there could also be new application and brokerage fees.
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