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I have one year left on my two-year fixed-rate mortgage. I am currently paying 1.16 percent on £300,000.
Should I close my deal and get a new one in case the rates go up further? AK, Lincolnshire
Ruth Jackson-Kirby replies: What a week it has been for mortgages. More than 1,000 have been taken off the market – the highest number ever in a single week. Residual interest rates have risen as lenders struggle with an uncertain interest rate outlook.
Turmoil: What a week it has been for mortgages as more than 1,000 have been taken off the market
When you set your mortgage, there were deals of less than 1 percent. Today, some two-year fixes are above 5 percent, which amounts to thousands of pounds in additional interest payments each year.
You’re not the only one wondering what to do. You’re in the fortunate position of being locked into a low rate, but when you move on to cashing in, you’ll likely find your payments skyrocket.
The question is whether we can bring that day forward a year in the expectation that interest rates will continue to rise, making it cheaper to take out a new mortgage now.
First, you need to consider early repayment fees (ERCs), which are required by most lenders if you close a deal early. These are usually charged as a percentage of the outstanding balance and are usually between 3 and 5 percent.
However, some ERCs fall in the course of the mortgage. For example, with a five-year commitment, the ERCs could drop by one percentage point each year from 5 to 1 percent.
David Hollingworth, associate director at mortgage broker L&C, says: ‘It’s important to check what the ERC will be to help understand the penalty for breaking the deal. It also makes sense to check if it’s going to fall in the near term, because then it could fall by a percentage point, saving you £3,000 in your case.’
Ultimately, you have to decide what you think will happen to interest in the coming months.
If you think they will continue to rise, you may decide it’s worth making a deal now rather than waiting a year to find out that rates are significantly higher.
But even mortgage experts and economists are horrified by making that call. Financial markets are currently expecting the Bank of England to raise the key rate – on which the cost of all debt is based – to 4 percent this year and perhaps even 6 percent by the summer. The mortgage interest rate will probably be at least one or two percentage points above this.
However, market expectations are in flux and could easily change in the coming weeks.
“Whether it makes sense to solve it now is a question that can only be answered with the luxury of hindsight,” says Hollingworth. “We just don’t know what could happen to price movements in the future. If the rapid pace of current changes tells us one thing, it’s that things can turn around in a very short time.’
If you stick to your current deal, you can use the money that would have gone to the ERC to overpay your mortgage. Most allow you to overpay by up to 10 percent without being charged.
Overpayments while your interest rate is low will have more of an impact as more of the money will be spent on settling the capital you owe and less on interest payments.
Then, when it’s time to transfer, you’ll need to borrow less.
You can usually shop around for a new mortgage well before the end of your current deal, as most offers are valid for up to six months. That could protect you from any interest rate hikes and you don’t have to pay an early repayment penalty.
And if interest rates fall in the intervening months, you can look for another deal and cancel the offer without penalty.
If you do switch early, keep in mind that your monthly payments will increase significantly, not even as much as if you waited another year to switch.
You are currently paying €1,153 per month on your mortgage and have 24 years left.
Now if you switch to one of the top two-year fixes, you can get 3.5 percent from Reliance Bank, which would boost your repayments to £1,542 a month. Over the next 12 months this will cost you an additional £4,664, plus £995 administration fee.
If you switch to one of the top five-year solutions at 3.67 percent, repayments would rise to £1,568 per month and cost an additional £4,980 over the next 12 months. This is at Danske Bank and there are no administration costs.
Fix for ten years with Lloyds at 3.88 percent and you’d pay an additional £5,394 over 12 months, with no arrangement fees.
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