Remortgaging – making a decision in a world of flux

The other morning I read that record numbers of homeowners are taking out fixed-rate mortgage deals as the threat of another interest rate hike hangs over the heads of homeowners like the sword of Damocles. According to the Council of Mortgage Lenders (CML), around three-quarters of home movers in recent weeks have fixed their monthly mortgage payments in an attempt to protect them from the next rate increase.

At a time when the market can apparently predict with some accuracy when the next rate rise will occur (notwithstanding January's hike, which took most people by surprise), fixed-rate deals are pretty attractive as far as options go. Basically, mortgage lenders assess where rates will go over the next months and so fixed rates rise or fall as a consequence of their calculations. The thing to remember is that the longer the term agreed to, the higher the rate will be.

But this begs the question, what if rates don't go up again? And even if they do, will it matter if lenders have already factored in the possibility? Although the CML says the average interest rate of a fixed-rate loan went up from 5.23 to 5.27 per cent in January, the Sunday Times has found that two-year rates dropped in February, with several deals now below five per cent. This suggests that the current borrowing cycle is close to peaking, if it hasn't already. And while these low rates may seem attractive, some believe that variable rates are better value.

In fact, home loans expert Ray Boulger from mortgage broker John Charcol has said that it is now too late for households to protect themselves against further rate hikes, partly because lenders have had the foresight to include another base rate increase in their deals. He also believes that borrowers could be better off going for a variable-rate mortgage, especially if rates have reached their peak and take a downward turn in the near future.

While variable deals involve lenders setting their own rates, which can rise or fall in accordance with the changes made to the base rate by the central bank, these kind of mortgages come in a range of guises, such as a tracker, capped or discounted, which may add to the confusion. The good thing about remortgaging to a variable rate is that you might get lucky and see the interest rate drop, but on the other hand you might be unlucky and see the interest rate rise. On the other hand, the advantage of remortgaging to a fixed-rate is that the homeowner knows exactly what will happen, although if interest rates drop, they will end up paying more than they might have done if they'd gone for the variable deal. And round and round it goes.

This leaves homeowners with something or a dilemma. They know they should probably remortgage but are at a loss when it comes to making a more concrete decision. Part of the problem is that the world of personal finance is riddled with contradictions and competing narratives. In the end, it means that homeowners have to base their decision on something other than macroeconomics and take a more personal outlook.

Personal judgements (which can be just as valid as those of professional analysts who are themselves merely making educated guesses) must play a part in any decision. Only the individual knows whether he or she will be able to meet repayments in six or 12 months' time. And only the individual knows whether his or her job is stable or if they are contemplating moving house when the kids go to uni. Other homeowners may simply want to play it safe or take a risk, depending on their personality and level of disposable income.

But help is at hand, of sorts, for those who seek it. Entering 'variable or fixed' into Google throws up an innumerable number of websites all clamouring to offer a lamp to the weary homeowner who walks in the valley of darkness where other lost homeowners have trod before. Some of these guides are trying to sell or broker mortgages through their website, which can be useful, although they're obviously in the market to sell a service or product. Price comparison sites are also helpful because they tend to be impartial.

While there is no easy way to make a decision regarding the type of mortgage, a judgment has to be made (even if it the decision to is to do nothing). Like everything in life, remortgaging is a risk and solutions aren't always perfect; nor does reaching a verdict preclude the fact that another type of mortgage may have been the better option after all. In the end, homeowners need to take a chance because there are very few guarantees. But as Voltaire once said: "Doubt is not a pleasant condition, but certainty is absurd."

Author: Richard Mather