If you are a borrower with a fixed-rate mortgage you may, following events this week, be toying very seriously with the idea of remortgaging – even if it means leaving your current deal early and stumping up a hefty exit fee.
Talk of emergency Bank of England (BoE) rate hikes and predictions of the interest rate hitting 6% next year, not to mention lenders pulling deals, have focussed homeowners’ attention on their repayments.
As such, the idea of locking into a longer-term fixed rate to shelter from the storm ahead has become more attractive.
Karen Noye, a mortgage expert at financial adviser Quilter, said borrowers who were coming to the end of their deals were flooding telephone lines trying to get a fixed rate deal.
But it wasn’t just those who were due to renew, Karen explained. “In fact, we are seeing more and more people look to suffer early repayment charges (ERCs) just to get the certainty of mortgage costs,” she added.
But what’s the best course of action? Face a hefty exit charge to lock into a more preferable rate or wait until your renewal is due, avoid the ERC but pay a high interest rate?
It’s a real conundrum. But the first piece of advice from experts is quite simply to ‘keep calm and carry on’.
Indeed, Gemma Bennett, a mortgage broker at The Mortgage Mum, said: “Panic is not advised but getting informed and making choices from a fully informed space is.”
Once you’ve taken a deep breath or two, you can start looking at your options. Here’s a bit more information to help you…
Check you mortgage: How much time is left on your current deal?
If you have six months or less until renewal
Check your current mortgage and see how much time you have left to run. If have six months or less left on your deal then you can remortgage now and won’t need to pay the ERC.
This is because there are a number of lenders who will allow you to fix in at a current rate up to six months before the mortgage is due to start.
Rates are looking highly likely to rise and if your current deal expired but you didn’t remortgage you would revert to your lender’s standard variable rate (SVR).These tend to be very expensive.
You may find the rate you remortgage onto is not as cheap as it was when you struck your initial deal two or five years ago. But it will be more attractive than in six months’ time.
Mark Robinson, managing director of Southampton-based Albion Forest Mortgages said: “If you’re six months away from the end of your current product, you should speak to a broker ASAP. Remortgage rates may be able to be secured at this point rather than waiting.”
If you have more than six months until renewal
If you have more than six months, you should think very carefully about switching deals.
An ERC is only worth paying if it is cheaper than the price you may pay for a new deal when it’s time to remortgage.
Michael O’Brien, managing director, mortgage advisers Home of Mortgages said: “The cost of exiting a fixed rate deal is very rarely the best advice.
“Lenders generally apply early repayment charges of between 3% and 5% of the loan, which would need to be paid when exiting a mortgage deal during a fixed rate period. On a mortgage loan of £250,000, the early repayment charge will generally be £7,500 to £12,500.
“Borrowers coming out of fixed rates now will be paying circa 4%, so why would someone exit a 2% fixed rate, pay an early repayment charge to jump onto a 4% rate, in order to avoid the ‘potential’ of paying a 6% rate in two years’ time?”
Another option, if you can afford to do so, is to make overpayments on your mortgage. Most lenders will allow up to 10% overpayments. This will bring down your loan so when you do come to remortgage the proportion of the loan relative to the value of the property will be lower and you’ll be eligible for more attractive rates.
What next?
Still not sure what to do? The best advice is to speak to a broker or adviser who can give you tailored advice on what to do next.
Gemma Bennett of The Mortgage Mum added: “Get a broker to look over your individual circumstance and requirements. There’s no ‘one-size-fits-all’ and they can assess the best approach depending on your particular plans and circumstances.
“There are scenarios where paying the ERC’s and remortgaging now do result in a potentially better outcome but that would need to be considered in each individual case.”
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