I have one year left on my two-year fixed rate mortgage. I am currently paying 1.16% on £300,000.
Should I abandon my agreement and enter into a new one in case rates go up further? AK, Lincolnshire
Ruth Jackson-Kirby responds: What a week it’s been for mortgages. More than 1,000 were taken off the market – the highest number ever in a single week. Rates on those that remain have jumped as lenders grapple with an uncertain outlook for interest rates.
Turmoil: What a week it’s been for mortgages as more than 1,000 have been taken off the market
When you fixed your mortgage, there were transactions below 1%. Today, some two-year fixed rates are over 5%, which means thousands of pounds of extra interest every year.
You’re not alone wondering what to do. You’re in the lucky position of being locked into a low rate, but when you come to remortgage, you’ll likely find your payments increase dramatically.
The question is whether to bring that day forward a year in the hope that rates will continue to rise, making it cheaper to lock in a new mortgage now.
First, you need to consider the prepayment charge (ERC), which is charged by most lenders if you leave an agreement early. These are usually charged as a percentage of the outstanding balance and are usually between 3 and 5%.
However, some ERCs fall over the mortgage. For example, over a five-year period, ERCs could drop by one percentage point each year, from 5% to 1%.
David Hollingworth, associate director at mortgage broker L&C, says: ‘It is 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 needs to drop in the short term, as that could see it drop by a percentage point, which in your case could save you £3,000.
Ultimately, you have to decide what you think will happen to interest rates over the next few months.
If you think they’ll keep rising, you may decide it’s worth striking a deal now rather than waiting a year to find that rates are still significantly higher.
However, making that call baffles even mortgage experts and economists. Financial markets currently expect the Bank of England to raise the base rate – on which the cost of all debt is based – to 4% this year and possibly even 6% by summer. . Mortgage rates are likely to be at least a percentage point or two above that.
However, market expectations are evolving enormously and could therefore easily change in the coming weeks.
“Whether it makes sense to correct now is a question that can only be answered with the luxury of hindsight,” says Hollingworth. “We just don’t know what might happen with rate movement going forward. If the current rapid pace of change tells us anything, it’s that things can turn around in a very short time.
If you stick with your current contract, you could use the money that would have gone to the ERC to overpay your mortgage. Most allow you to overpay up to 10% without incurring a fee.
Overpayments while your interest rate is low will have more of an impact because more of the money will go to offsetting the principal you owe and less to interest payments.
Then, when you remortgage, you will have to borrow less.
You can usually shop for a new mortgage long before your current contract ends, as most offers are valid for up to six months. This could protect you from certain interest rate increases and you would not have to pay a prepayment penalty.
Also, if interest rates drop in the following months, you can seek another offer and drop the offer without penalty.
If you switch early, keep in mind that your monthly payments will increase significantly – although not as much as they would if you waited another year to switch.
You are currently paying £1,153 a month on your mortgage and you have 24 years left.
If you switched to one of the best two-year solutions now, you could get 3.5% from Reliance Bank, bringing your repayments to £1,542 a month. Over the next 12 months it would cost you an additional £4,664 plus an arrangement fee of £995.
If you upgraded to one of the best five-year fixes at 3.67%, repayments would increase to £1,568 per month and cost an additional £4,980 over the next 12 months. It’s with Danske Bank and there are no arrangement fees.
Fix for ten years with Lloyds at 3.88% and you’d pay an additional £5,394 over 12 months, with no arrangement fees.
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