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Remortgaging surges by 23%: should you switch to a fixed-rate deal?

Base rate speculation prompts surge in mortgage applications

In the lead up to August’s base rate rise, home owners rushed to remortgage to fixed-rate deals. But six weeks on, is it still worth switching if you’re on a variable rate?

In the month of July, remortgaging surged by 23% compared with the same month one year earlier, new data from UK Finance shows.

On 2 August, the Bank of England increased the base rate, pushing up the cost of variable rate mortgages.

Which? looks at how the base rate affected fixed-rate deals and what to consider before remortgaging.

Homeowners rush to remortgage

Over the course of July, around 46,900 homeowners remortgaged their properties to a new deal, according to figures from UK Finance, the trade body representing lenders. That’s 25% more than the month prior, and 23% more than the same time last year.

The value of remortgaging for July hit £8.7bn, a 26% increase year-on-year.

Landlords also joined the trend, with 14,700 remortgages for buy-to-let property completed in the month – a 7.3% increase.

So why were homeowners so eager to take out a new mortgage? By July, speculation had begun mounting that the Monetary Policy Committee would raise interest rates at its next meeting on 2 August.

UK Finance director of mortgages Jackie Bennett said: ‘The residential remortgaging market saw its strongest July in over a decade, as homeowners pre-empted the latest Bank of England rate rise by locking into attractive fixed-rate deals.’

In this case, the rumours proved correct, with the MPC announcing a 0.25% increase on 2 August, to bring the base rate to 0.75%.

How does the base rate affect mortgages?

The base rate influences how much banks must pay to borrow money. When the base rate goes up, borrowing becomes more expensive, and banks tend to pass this cost on to their mortgage customers.

Between 2 August and 3 September, half of mortgage providers raised their Standard Variable Rate (SVR) by the full 0.25%.

You’ll generally pay the SVR if your fixed rate deal has expired and you haven’t chosen a new one.

The SVR tends to be generally more expensive than a fixed-rate, discount or tracker deal. Research from mortgage broker Trussle recently found borrowers could pay on average an extra £2,500 over a year by moving from a two-year deal to the SVR (based on a £150,000 mortgage at a 60% loan to value ratio and 25-year term).

You can use our repayment calculator to work out how your payments might be affected by an increase to your interest rate.


Are fixed-rate deals affected by the base rate?

While the base rate has an obvious effect on mortgage SVRs, its impact on fixed-rate deals can be more complex.

Often, providers start to increase rates for fixed-rate deals in the lead up and immediate aftermath of a base rate rise. But then again, they may also be tempted to offer deals that entice customers to fix.

The last time the base rate increased in November 2017, it moved to 0.5%, the first increase in a decade.

From October to December, the average cost of two-year fixed rate mortgages climbed by 0.17%, while the average for five-year deals went up 0.16%, Which? analysis of Moneyfacts data shows.

This time around, however, there’s been less movement – the average cost of both two-year and five-year deals has increased by just 0.02%.

For this reason, you wouldn’t necessarily be much worse off remortgaging now than in July.

It’s possible that more rate hikes could be on the horizon, though the Bank of England has confirmed that ‘any future increases…are likely to be at a gradual pace and to a limited extent.’

Should you fix your mortgage deal?

Whether a fixed-rate deal is right for you will depend on your circumstances.

Staying on the lender’s SVR tends to be one of the most expensive ways to pay interest. If the base rate rises again, it may push the cost up further – and keep in mind the lender can also raise the rate at any other time, for any reason.

A fixed-rate deal will give you security over your interest payments, as your rate won’t change at any point during the set  time. The longer the fixed period, the more you’ll generally pay.

Then again, a fixed-rate deal may not be suitable if you’re likely to move at any time during the deal period. You’ll usually need to pay a penalty if you pay the mortgage off early, in the form of and early-repayment charge (ERC), which could be up to 5% of the mortgage.

If you need more flexibility, you could consider a variable rate mortgage – such as a discount deal, which is pegged to the SVR, or a tracker mortgage, which moves with the base rate.

Get expert advice

If you’re unsure which mortgage is right for you, you may benefit from talking to a mortgage broker, who can help you find the right deal for your circumstances.

For a free callback from Which? Mortgage Advisers, fill out the form below.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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