Should we remortgage early to take advantage of rock bottom mortgage rates?
We are three years into our five-year fixed rate mortgage but have seen some very cheap deals being launched.
Should we pay our early repayment charges and switch early?
Or is this a false economy? How do we work out when it makes financial sense?
Average five-year mortgage rates have fallen from 3.48% three years ago to 2.15% today
Shaun Church, Director at Private Finance, replies: With a spate of ultra-low rate mortgage deals being launched on the market this year, many borrowers who recently locked into a longer term fixed deal will be wondering if they jumped the gun.
You took out a five-year fixed rate mortgage three years ago, when the average rate at 75 per cent loan-to-value was 3.48 per cent.
Now, average rates have fallen to an average of 2.15 per cent, and if you’re not keen to fix for another five years, a typical two-year fixed rate is even lower at 1.37 per cent.
On that basis alone, it would appear switching could reduce your mortgage bill significantly. But there are a whole host of other factors to consider when deciding whether to leave a fixed rate mortgage deal early.
The most obvious is early repayment charges. These apply to most fixed rate mortgages and vary according to lender and mortgage size.
Church: 'As you’re three years into your current deal, if your ERC is tiered, you could be in luck.'
Typically, they range from 2 per cent to 5 per cent of your outstanding loan, and are either charged as a fixed percentage or are tiered, meaning the amount you have to pay decreases with every year of the deal.
Some lenders will charge this on the original loan amount, while others will base this on how much you have left to pay off.
It’s best to check your paperwork to find out how much exactly you’ll need to pay.
As you’re three years into your current deal, if your ERC is tiered, you could be in luck.
However, ERCs can run into thousands of pounds and might mean it’s more cost effective to stay put.
You also need to calculate how much you would be paying each month on a new deal compared to how much you’re paying now. While the rate is important, loan size also plays a role.
It’s likely the value of your home has changed over the past three years, so it’s a good idea to see what similar homes have been selling for recently in your area to get an idea of how your new mortgage lender would value your home.
If rising house prices mean you would now fall into a lower LTV bracket, your monthly costs would fall accordingly.
Additional charges, such as product or valuation fees, can also apply – although lenders often reduce or waive these when you are remortgaging.
If you have a specific deal in mind, make sure you check the affordability requirements carefully.
Lenders will be looking for a clean record of repaying debts, so if anything has happened in the past three years to damage your credit score, now might not be the time to remortgage.
It's always worth checking
Despite these potential pitfalls, it is definitely worth reviewing your mortgage on an annual basis, and in the right circumstances you could save hundreds of pounds each month by taking advantage of today’s low rates.
Over the course of two years, this could outweigh any initial fees.
If you ultimately find that switching doesn’t make financial sense, it’s worth checking whether your lender can arrange a product transfer to another one of its deals.
You will pay a reduced early repayment charge, but could still save money if it’s better than the arrangement you have now.
Your mortgage is likely to be your biggest financial commitment, so we would always recommend seeking advice.
An independent mortgage broker can help you decide whether it’s worth switching and help find the most affordable and appropriate deal for you.
Most watched Money videos
- Aston Martin unveils new Vantage sports car capable of 202mph
- Skoda reveals Skoda Epiq as part of an all-electric car portfolio
- Would you retire abroad for cheaper living costs?
- The new Volkswagen Passat - a long range PHEV that's only available as an estate
- Steve McQueen featured driving famous stunt car in 'The Hunter'
- BMW's Vision Neue Klasse X unveils its sports activity vehicle future
- Pair of rare 1980s Ford Sierra RS500 Coswotths head to auction
- MG unveils new MG3 - Britain's cheapest full-hybrid car
- German car giant BMW has released the X2 and it has gone electric!
- Mini unveil an electrified version of their popular Countryman
- Iconic Dodge Charger goes electric as company unveils its Daytona
- How to invest to beat tax raids and make more of your money
- Disgraced crypto tycoon Sam Bankman-Fried sentenced to 25...
- Stocks and shares Isa transfer and cashback deals you can...
- Superdry founder Julian Dunkerton ends his pursuit of the...
- Quiz founder Tarak Ramzan steps down as fashion firm...
- No one should expect sympathy when the crypto bubble...
- Insurers are STILL stinging drivers by undervaluing...
- My friends say I'm a shopaholic but I'm 34, single and...
- Celebrity skincare favourites help boost sales at Boots...
- MARKET REPORT: North Sea oil producer Enquest posts loss...
- Bidding war erupts for UK telecoms firm Spirent as...
- Cost of Baltimore bridge disaster will run into multi...
- Interest rate cuts still 'a long way off' despite falling...
- The turning of the tide for luxury e-commerce? Shoppers...
- Nearly half of young people don't realise buy now, pay...
- My blood boils when I hear critics say Waspi women should...
- Legal firm representing St James's Place customers to...
- JD Sports boss fires out at Nike for failing to produce...
- AO World shares surge as online retailer electronics...