The Scramble For Remortgage Applications Remains High Before Base Rate Rises In 2012

The Bank of England's base rate is presently at a historic low of 0.5% and has been at this low figure since summer '09

. It has been thought by a majority of insiders and commentators that the Monetary Policy Committee of the Bank will start to increase the base rate in the last quarter of 2011. On 11th May, Mervyn King, Governor of the Bank of England said, "Bank rates cannot stay at this level indefinitely and at some point it will return to more normal levels."

The Bank of England's Monetary Policy Committee (MPC) was set to raise interest rates in February 2011 before worse than expected growth figures forced them to keep interest rates on hold.

What Does This Mean for Mortgage Borrowers? An increase in the cost of borrowing will be a chief worry for homeowners who presently are on a tracker or a variable rate mortgage. The variable rate mortgage product is one in which the rate of interest on the loan is evaluated periodically and altered by the lender, usually tracking the rate set by the Bank of England's MPC.

A hike in interest rates will affect millions of variable rate borrowers. It is also likely to come as a shock to people who have enjoyed the benefit of low mortgage repayments over the last couple of years.

An increase in the Base rate of just 0.5 per cent (to 1 per cent) would result in a GBP 62 increase on a GBP 150,000 'interest only' mortgage. With inflation over 4 per cent and the cost of many other essential purchases rising sharply, finding an extra GBP 750 a year to repay their mortgage could be tough for thousands of households.

Today, almost 60 percent of borrowers have either variable or tracker rate mortgages, so of course increases in interest rates would affect all of these people. The news of an increase later in the year has caused a surge in remortgages in order to fix costs in the future.

Figures Show Many Now Remortgaging to Hedge Against Interest Rate Hikes: An organisation called the Council of Mortgage Lenders, who represent almost all mortgage lenders in Britain confirmed that remortgage figures had increased by almost a fifth in the first quarter of this year following the announcements by the Bank of England.

The rise in remortgage approvals - the figures are up year on year - has been attributed to the prospect of an increase to the Bank of England Base rate. The CML said: "The huge rise in remortgage activity is likely to be linked to the expectations of an increase in interest rates."

Further comments suggested that many of those who are remortgaging are doing so to switch from variable and tracker mortgages to fixed rate contracts to avoid further increases on their monthly repayments.

The benefit of a fixed rate mortgage is that the interest rate remains at a fixed level for the entire life of the deal and so monthly repayments remain the consistent. This is a clear incentive for those borrowing to change to a product where they can plan repayments with a degree of predictability in these turbulent economic times.

by: Howard Ogollegos

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