Remortgage: repayment or interest-only?
Are you thinking about a remortgage? Whether you`re coming to the end of your current mortgage deal or looking to get a better deal, the remortgage market might be able to offer you something interesting.
Why? From the individual`s point of view, perhaps the only good thing to come out of today`s economic crisis is the cut in the Bank of England`s base rate, which has dropped from 5.75% to 3% in the last 12 months. For anyone looking for a remortgage, this could be promising, as it may help banks and building societies offer remortgages with a lower APR (Annual Percentage Rate).
Remortgage - where`s the cut?
However, as the Council of Mortgage Lenders has stressed, lenders that provide mortgages and remortgages don`t `automatically benefit from any cut in Bank rate`. They can`t simply cut the cost of their mortgages / remortgages as soon as the rate comes down.
You won`t find a remortgage with an APR anywhere near as low as the Bank`s base rate. But you still might be able to remortgage at a lower rate than you`re paying on your current mortgage.
Remortgage: repayment or interest-only?
At a time like this, it may be tempting to remortgage with an interest-only deal. According to the mortgage calculator on moneymadeclear.fsa.gov.uk (from the Financial Service Authority (FSA)), a 25-year, £150,000 remortgage at 6% would cost £750 per month on an interest-only deal - but almost £970 on a repayment deal.
However, there`s a good reason for that. An interest-only remortgage / mortgage doesn`t actually pay off the capital - so at the end of the deal, you`ll still owe the full price of the house!
When does an interest-only remortgage make sense?
An interest-only remortgage can make sense if you know how you`re going to pay off the capital at the end. You might be planning to sell the property at a profit (which can be a dangerous assumption), or you might be investing - in a pension or endowment, for example.
Or, if your finances are stretched too thin, you might sign up to an interest-only remortgage as a temporary measure, and switch to a repayment mortgage when you can afford it. An interest-only remortgage could be one way of getting through some tough times - but make sure you look around for a repayment mortgage as soon as your financial situation improves.
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