Given that interest rates are expected to rise in the next few months, is it worth it now to pay a fee for early repayment and establish a mortgage at a lower rate? We asked three mortgage experts what they advise clients to do.
Interest rates in the UK 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 raised rates to 1.75%, the sixth in a row, and it is widely expected to be raised again this Thursday 22 September, exceeding 3% by the end of 2022 and 4.25% by August 2023 . The increase poses a dilemma for those with fixed-rate mortgages due to end next year: should they stick to their current low rate and risk a hike in interest rates when it ends, or lock in a lower rate now and forfeit their mortgage payments? early repayment. .
Read more: Interest Rates: Inflation data makes another BOE surge more likely
While it’s tempting to arrange a mortgage on your own, a professional mortgage broker will have access to customized products and can perform calculations and scenarios to offer you the best deal. They usually charge a small fee of £300 to £600, although sometimes it is paid by the lender at no cost to you.
“Avoid talking to a ‘pub friend’ who wants to share his experience with you,” says Mark Humphrey, director of MCH Mortgages. “I have seen so many people take well-intentioned “advice” from friends over the years, but since their situation and requirements are usually very different from yours (and they are not qualified to give advice), it can end up costing you dearly. more than if you were to seek the advice of an expert.”
“We’re seeing more people asking if they should be early off their fixed-rate mortgages, even with huge prepayment fees in the background and the reality of losing a great rate in favor of a higher one,” Tucker said. , founder of The Mortgage Mum. “That’s where brokers come in – we can look at their individual situation and decide if it’s the best thing to do, taking everything into account.”
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First, it’s worth knowing that if you have six months or less left on the flat rate, you may not even need to pay a prepayment penalty. “While in most cases your existing lender will not offer you a new rate until 3-4 months before [the end of your fixed term], it is possible to secure a new follow-up rate for up to six months in advance,” says Humphreys. “While rates are insured in advance to avoid early redemption, your new rate will not take effect until your current rate has expired.” He adds that if your bet is due to end before March 31, 2023, you should start considering options now.
Read more: UK property market sucks £84bn in new mortgages
If you have more than six months left to work on a fixed rate, the first figure the broker will ask for is the prepayment fee, the fee you pay to pay off your fixed rate mortgage early. “Exit fees can vary from lender to lender, but have traditionally been higher in previous years,” says Emma Jones, managing director of When the Bank Says No. 1 year: 5%; Year 2: 4%; 3rd year: 3%, 4th year: 2%, which means that if you are in the last 18 months of your deal, the exit fee can be significantly lower than in the early years.” Other lenders may charge a fixed interest rate to pay off the mortgage at any time. Sometimes, even with a likely increase in interest rates, exiting early is not the right financial decision. “Having worked with numbers, [our clients’] circumstances and ultimately the associated prepayment costs, it often happens that it doesn’t justify itself financially,” says Humphrey. “The prepayment fee was too high to justify leaving early.”
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Besides weighing the numbers, another important factor to consider is personal circumstances. “For a lot of people, the rise in the cost of living has been significant, putting more pressure on their finances, and the last thing they need right now is a much higher mortgage payment,” Jones says.
Sarah Tucker believes the most important question to ask yourself is: Why do you want to leave? “Is it because of the pressure you feel because of rising interest rates? Want to borrow more money on a mortgage? Are you bidding higher than current market rates? Has your situation changed? You must 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 a different risk appetite: some are very cautious, some are very jaded, and most of us are somewhere in between,” says Humphrey. “Given that, the very cautious of us might be more inclined to switch now and take on the responsibility of knowing exactly what their payments will be over the next five years.”
Whatever your situation, be sure to get expert advice from someone who will check the numbers for you, and as Sarah Tucker advises: “Don’t panic when exiting your mortgage. It’s not always right.”
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