Homeowners are being encouraged to shop for a remortgage. The opportunity to save money and build a safety net against rising interest rates is a possibility. During times when inflation is in rapid growth and causing financial issues for family budgets it makes sense to seek any relief possible. However, since the interest rate is the important factor in choosing a remortgage for many homeowners it could be a mistake to choose one simply for the fact it has the lowest interest rate.

In simple terms, the interest rate determines the cost of borrowing. How much a home buyer will pay in borrowing money to purchase property is determined by the interest rate. There can be other costs involved like valuations and legal fees, but the main determination on the amount a loan will cost is the interest rate.

The interest rate could be tied to a different type of loan than the homeowner has currently. For instance, a tracker will follow the Bank of England’s standard base rate. It could be a loan that is a specific amount above the rate set by the Bank. If the Bank’s rate goes up, so will the tracker loan’s interest rate and thus the cost of borrowing. The homeowner would expect a rapid increase in their repayment schedule. It could also go down when the Bank’s rate decreases as it did during the onset of the pandemic and lockdowns.

A fixed interest rate is set and does not change for the length of the term of the loan. At times when the interest rate could decrease, the borrower could miss out on paying less. However, when there is a possibility of rising rates, the fixed rate deal could protect the borrower from paying more. 

When a home buyer borrows they could choose from the possible deals and make a decision that is best for their needs. Those that feel comfortable knowing their set repayment amount and would not want to risk paying more would likely choose a fixed rate deal. Because of the warnings of experts that the Bank’s rate could increase several times this year and next, most borrowers would prefer a fixed rate to escape paying anything more than they start with and feel they could handle the same amount month after month.

Those that did not foresee the changing economic environment could choose to end their current deal early. There are likely penalty fees for ending a mortgage term early, but many homeowners are paying the fees to gain peace of mind with a fixed rate available now rather than face higher rates later on when their deal would end. It could prolong the need to face higher interest rates and worth the expense of penalty fees.

Of course, homeowners that are close to having their current term end are likely already shopping for a deal. Those that had their mortgage term end and rather than remortgaging had their loan moved to their lender’s standard variable rate (SVR) are encouraged to shop as soon as possible if they are not already. They could be paying double or more the interest rate level available with a remortgage. 

There are considerations for homeowners shopping for a remortgage. The lowest interest rate could the main reason to choose one deal over another. However, that could be the wrong choice for some. There are fees that could make the lowest interest rate deal less of a savings.

Experts encourage all remortgage shoppers to review deals and take into thought the fees as well as the savings offered by the interest rate as the lowest interest rate deals are commonly the deals with highest fees. By choosing a slightly higher rate, the fees could be lower and offer a greater savings.

Of course, some homeowners could have other needs that make the fees less important, such as securing a longer term fixed rate to avoid increased interest rates that could occur this year and next.

There are many choices with remortgages and homeowners should consider several choices in narrowing down to the best remortgage for their needs.