This follows the Bank of England’s base rate hike to 2.25% on 15th September, leaving homeowners with six months or less left on their current mortgage facing a great deal of uncertainty.
In the hopes of helping worried homeowners to understand their options, the mortgage experts at www.onlinemortgageadvisor.co.uk share their insight on the pros and cons of switching to a new mortgage deal now, despite the early repayment charge.
What is the early repayment charge?
If you try to end your current mortgage deal before the official term ends, you might be hit with a fee known as an early repayment charge. This penalty is given because lenders earn a certain amount of interest over the course of any mortgage term, so by ending your deal earlier than expected they will be losing money.
The early repayment charge accounts for this. It’s worth noting that the penalty can also be applied if you’re looking to pay off just a chunk of your mortgage early - usually more than 10% of the outstanding balance - in the hopes of reducing your monthly payments, as this will also lead to a loss of money for the lender.
Some mortgages are offered without early repayment charges, so it is worth checking whether the charge applies to your deal. That being said, if you’re looking to switch onto a deal without the penalty, keep in mind that this often means the interest on your deal could be significantly higher.
How much might an early repayment charge cost?
The cost of an early repayment charge will depend on the size of your mortgage, as well as how close to the end of the deal you are – the closer you are, the lower the fee will be. The charge will tend to be a percentage of the amount still left on your deal and can be anywhere between 1% and 5%. What’s more, this percentage can change as you progress through your deal. For example, if you’re only one year in it might be 5%, however, in five years’ time, it could come down to as low as 1% of your outstanding balance.
When should I think about switching to a new deal?
Following the fiscal event announced by the government this week, also known as the mini-budget, the value of the pound has plummeted and many mortgage lenders are pulling deals off the table. On top of this, the base rate has been going up and is expected to increase to as much as 3% by the end of the year. With all of this uncertainty, it’s definitely worth looking into switching to a new deal if you only have six months or less left on your current mortgage.
If you have longer than six months left it’s important to keep in mind that, when your deal ends, you could actually qualify for exactly the same rates but this is uncertain right now, so you need to weigh up whether the early repayment charge is worth the security of switching to a new deal early. This decision can have a massive impact on how much in total you’re paying on your mortgage, so be sure to consult with a mortgage advisor who will be able to calculate which option will save you the most money.
Is it too late to switch?
With all of the news about mortgage deals being withdrawn, you might feel that the opportunity to switch to a new deal has passed. However, it’s of vital importance to be aware that the majority of mortgage products are still available, so there are plenty of options left on the table, despite the ongoing volatility.
In addition to this, interest rates are predicted to rise even more, to a much higher level, in response to growing inflation and the government’s new fiscal policies. With this in mind, it is advisable to look at switching sooner rather than later, to avoid more expensive deals in the future. If your deal is set to end anyway, you could end up saving a massive amount of money long-term by getting ahead and securing a fixed-rate mortgage well before any further economic downfall occurs.
