Personal Finance

Early repayment fees: does forking out to remortgage pay off?

The average rate for a two-year fixed mortgage has risen to nearly 6% despite government efforts to calm the financial markets.

Lenders temporarily withdrew more than 40% of mortgage products last week after Chancellor Kwasi Kwarteng’s mini budget fuelled fears that the Bank of England would raise interest rates to higher levels than expected.

Although many of the bigger banks are now offering new deals, price revisions are increasing mortgage costs. The average two-year fix had already risen from 2.34% at the start of last December to 4.74% on 23 September, and climbed even higher to reach 5.97% yesterday.

And with further interest rates expected over the coming year, many homeowners are weighing up the cost of securing a new fixed rate deal even if their current mortgage is not due to end soon.

‘Batten down the hatches’

“The most obvious course of action to guard against a mortgage rate rise is to take cover and batten down the hatches,” said the HomeOwners Alliance.

Locking down a fixed rate mortgage can “give you a period of budgeting certainty”, the consumer advice site continued. Homeowners coming to the end of their deal can lock in the best deals now, as “lots of lenders’ offers are valid for six months”.

Switching to a better deal may also pay off even if you have more than six months left on your current deal and get hit with an early repayment charge.

Some fees “can be huge”, warned The Money Edit, but “this doesn’t mean you shouldn’t consider it as the longer-term savings can be significant”, especially if you have a big mortgage debt. “You need to do the maths,” the site added.

Calculating the cost

First, calculate the cost of repaying your mortgage early. Rather than a flat rate fee, the charge is “usually calculated as a percentage of the balance outstanding”, said Rupert Hargreaves at MoneyWeek. The cost can also vary depending how far you are into your current deal.

Although this “large lump sum” might seem like “a daunting amount to pay upfront”, Hargreaves wrote, “repaying early could save you a fortune in interest charges”. You may pay more interest on the new deal in the short-term but could potentially save thousands over the life of the product if mortgage rates soar before you were originally due to refinance.

Gambling on rates

Ultimately, quitting a deal early to remortgage is a “gamble”, said Hargreaves. “You simply won’t know if it was a good idea until a year has passed and you can see what happened to interest rates.”

The events of recent weeks have shown how “the economic picture can completely change in just a few hours”, and “that can lead interest rate predictions to fluctuate hugely”, he added.

MoneySavingExpert agreed that “there are no guarantees” and that “without a crystal ball, we don’t know how much rates will rise by”.

The HomeOwners Alliance advised that before making a decision, “it’s a good idea to speak to a broker about your options”, as they can “run through the costs and potential savings with you”.

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