With interest rates expected to rise in the next few months, is it worth taking the hit of paying an early repayment charge and fixing your mortgage at a lower rate now? We’ve asked three mortgage experts on what they’re advising clients to do.
UK interest rates have been low for so long that it’s easy to assume that borrowing will always be cheap – but that’s starting to change. In August, the Bank of England increased rates to 1.75%, the sixth consecutive increase, and it’s widely expected that they will be increased again this Thursday, 22nd September, rising above 3% by the end of 2022 and 4.25% by August 2023. These increases leave those with a fixed rate mortgage due to end in the next year with a dilemma: should they stick with their current low rate and risk a jump in interest when this ends or fix now on a lower rate and forfeit the early repayment charge.
Engage a professional mortgage broker
While it’s tempting to organise a mortgage yourself, a professional mortgage broker will have access to bespoke products and can run through calculations and different scenarios to get you the best deal. They will usually charge a small fee, between £300-600, although sometimes this is paid by the lender at no cost to you.
“Avoid speaking to the ‘friend in the pub’ who wants to give you the benefit of their experience,” says Mark Humphrey, director of MHC Mortgages. “I’ve seen so many people over the years take well-meaning ‘advice’ from friends, but because their situation and requirements are usually very different to yours (and they’re not qualified to give advice), could end up costing significantly more than if you had sought advice from an expert.”
“We’re noticing an increasing number of people asking whether they should leave their fixed rate mortgages early, even with a huge early repayment charge in the background and the reality of losing an excellent rate in favour of a higher one,” said Sarah Tucker, founder of The Mortgage Mum. “That’s where brokers come in – we can look at their individual situation and decide if that’s the best thing to do taking everything into account.”
Secure six months ahead
Firstly, it’s worth being aware that, if you have six months or less left on your fixed rate, you might not even need to pay an early repayment penalty. “Whilst in most cases your existing lender won’t offer you a new rate until 3-4 months before [the end of your fixed term], it’s possible to secure a new follow-on rate up to six months in advance,” says Humphreys. “Whilst rates are secured in advance, to avoid early repayment charges, your new rate wouldn’t tend to start until your current rate has expired.” He adds that if your rate is due to end before 31st March 2023, you should start looking at your options now.
Early repayment charges
If you’ve got longer than six months left to run on your fixed rate, the first figure a broker will ask for is your early repayment charge, the fee you pay to leave your fixed rate mortgage early. “Exit fees can vary from lender to lender but are traditionally higher in the earlier years,” says Emma Jones, managing director of When The Bank Says No. “For example, a 5-year fixed rate with some lenders would bring exit fees of year 1: 5%; year 2: 4%; year 3: 3%, year 4: 2%, which means if you are in the last 18 months of your deal the exit fee can be considerably lower that the initial years.” Other lenders may charge a flat rate percentage to redeem the mortgage at any point. Sometimes, even with the likely interest rate increases, exiting early isn’t the right financial decision. “After working through the figures, [our clients’] circumstances and ultimately the early repayment charges involved, it’s often the case that it wasn’t financially worthwhile,” says Humphrey. “The early repayment charge was too big to justify leaving early.”
As well as weighing up the numbers, another important factor to consider is personal circumstances. “For many people the increase in the cost of living has been significant, which has put more pressure on their finances, and the last thing they need right now is a much higher payment on their mortgage,” says Jones.
Sarah Tucker believes that the most important question to ask yourself is: why do you want to leave? “Is it because of the pressure you feel with rising interest rates? Do you want to borrow more money on your mortgage? Are you on a higher rate than current market rates? Has your situation changed?” You need to be clear about whether this is the right course of action for your circumstances and future plans.
Psychology also comes into play. “It’s worth considering that we all have differing appetites for risk, with some very cautious, some very blasé and most of us somewhere in the middle,” says Humphrey. “With this in mind, the very cautious amongst us may be more inclined to switch now and incur the charge to know precisely what their payments will be for the next five years.”
Whatever your situation remember to get expert advice from someone who will run through the figures for you, and, as Sarah Tucker advises: “Don’t panic exit your mortgage. It’s not always the right thing to do.”