Remortgaging

Reduce the cost of your single biggest debt

The technical definition of a recession is when the economy has shrunk for at least six months, as measured by negative Gross Domestic Product (GDP) figures for two successive quarters. There is often debate about when precisely an economy is in recession, as it is possible for certain business sectors such as manufacturing to be in recession when other sectors aren’t.
If the recession is directly affecting your personal finances, one way to cut your monthly expenditure, if appropriate to your particular situation, is to remortgage. This could reduce the cost of your single biggest debt and protect you against the risk of future rising repayments by locking into a fixed or capped rate deal. Some lenders are also offering discount deals with no penalties for switching at the end of the special rate period.

If you are coming to the end of your current fixed or discounted deal, moving to your lender’s variable rate paradoxically may mean that you benefit from a lower rate due to the spate of interest rate cuts by the Bank of England in an attempt to curb inflation. However, this could leave you exposed to future rate increases.

You need to consider any high arrangement charges, lengthy lock-in periods and high exit fees that may apply to any new deal. However, a higher fee can be worth paying if you make savings on interest payments over the term of your mortgage. As a rule of thumb, the bigger the mortgage the more important the rate, rather than the fee, becomes.

Conversely, the fee assumes more importance than the rate on smaller mortgages. But the longer you are tied in, the more important the rate becomes as the impact of extra interest increases. Stepped rates are also worth watching out for. These mortgages offer a competitive low rate in year one before it is ratcheted up in the following years, when you may be locked in to the higher rate.

Flexible mortgages allow you to make overpayments when you can, reducing your overall debt and interest bill, as well as enabling you to take payment holidays if you needed to. In the event that you were made redundant, you may also be able to stop your mortgage payments for an agreed period of time, or draw down a lump sum to help you out until you found new work. But even if your lender allows you to take a payment holiday, you should remember that the unpaid interest will still be rolling up, increasing the overall debt you owe.

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