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

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.'

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.

What to think about when leaving a mortgage early? 

How is your early repayment charge calculated

For example, if you are three years into a five-year fix and it is tiered down from 5 per cent, it could currently be 3 per cent of the outstanding loan. 

How much will this cost you?

If you have a charge as above on an outstanding balance of £150,000, it would be £4,500

How much will you save each month?

Your repayments now vs potential lower ones. For example, moving from a 4 per cent rate to a 2 per cent rate on a £150,000 mortgage with 20 years left would see payments drop from £909 to £759 - a saving of £150 per month

How much will you save over the rest of your mortgage?

For example, moving mortgage three years early to save £150 per month would be a total saving of £5,400 

Are there any other fees or charges involved? 

Will you have to pay a new mortgage arrangement fee, a lender's exit fee, or a fee to a broker?

How does what you will save compare to the cost of moving?

In the instance above where the new deal had no arrangement or broker fee, but the old deal had a £150 exit charge, the total cost of leaving would be £4,650, while the saving from the new mortgage would be £5,400 - so a net gain of £750. 

How much is the saving if spread out over the months?

That £750 saving over three years is a decent amount, but works out as just £21 per month after all the costs are factored in. A borrower must decide if that is worth moving for. 

- This is Money 

 

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.

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