LYDIA and Paul Joseph emptied their kids’ savings accounts to pay a hefty £12,400 charge to re-mortgage early .
The couple think it’s worth it though, as a new calculator helped them work out they could save more in the long run by getting a better mortgage deal now.
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If you want to leave your mortgage deal before it ends, you’ll usually have to pay a fee.
So-called Early Repayment Charges are typically a percentage of the total amount you owe on your mortgage, so can easily cost tens of thousands of pounds
But with interest rates on the rise, many people may be tempted to pay this charge and lock in a better deal now before rates climb further.
Millions of homeowners have a mortgage deal that’s due to run out in the next 12 months – and they will find rates for new deals are much higher than the last time they fixed.
According to Moneyfacts, a typical two-year fixed mortgage rate was 2.52% in August 2021 but has risen to 3.95% today.
An average five-year fixed deal is now 4.08%, up from 2.75% a year ago.
Lydia, 34, who works for a research company and 42-year-old freelance writer Paul’s, mortgage deal is due to end in April next year.
They bought their home in Faversham, Kent, in October 2020 for £485,000.
They are currently on a three-year fixed rate mortgage at 2.08% with Barclays.
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But the couple were worried that soaring interest rates could mean their monthly repayments could rocket when their deal runs out in 2023.
“I started wondering if it might be worth paying the penalty to get out of my current mortgage now and fix to a new rate,” Lydia said.
She went to her current lender – Barclays – to find out her options. It said she could lock in a fixed rate of 2.7% for seven years.
“But I was shocked when I discovered the early repayment charge was 3% of my total mortgage balance, which worked out at £12,400,” she said.
She used a new calculator from Nous to work out which was the more cost-effective option – sticking or switching.
It takes into account how much you have left on your mortgage, the term remaining on the fixed deal, monthly repayments and the exit charge.
The tool calculates whether you could save money even if you pay an early repayment charge, because you’ll be avoiding higher interest rates in the future.
Its calculations are based on current estimates that the typical mortgage rate will be 6% by 2024.
The tool asks whether you believe rates will be higher or lower than this – and either adds or deducts 1.75 percentage points on to that interest rate, based on your answer.
Using the tool, Lydia found that even with her early repayment charge, she would stand to save thousands by switching to a better mortgage deal:
- Based on market estimates (6% interest): £9,480 better off
- In a pessimistic scenario (7.75%): £11, 116 better off
- In a very pessimistic scenario (9.5%): £13,581 better off
“It was enough to convince me that paying the early repayment charge and re-fixing now was the right thing to do,” Lydia said.
But Lydia would need to find £12,400 to pay the fee – it wasn’t possible to add it as extra borrowing toe her mortgage,
To raise the cash, she took £6,500 from the savings pot of her two children, Louis, 8, and Ines, 6.
The other £5,699 was taken from Paul’s personal savings account, which he uses to save for his pension.
“It’s a huge sacrifice,” Lydia said.
“That’s my kid’s college money – and it’s a gamble. But based on what I’ve been reading, I think it will pay off.”
But there’s no guarantee Lydia will save as much as she hopes – tools like this are speculative, as we don’t know for certain what will happen to interest rates.
Should I switch NOW and pay an early repayment charge?
You might be tempted to switch now and save on interest repayments in the long-run – even if it means paying an early repayment charge.
Typically, early repayment charges are between 1% and 5% of the outstanding balance on your mortgage.
So if you have a £100,000 mortgage and a 5% charge, you’d pay £5,000.
Experts warn you need to consider the charges carefully before going ahead with any early re-mortgaging deal.
It’s only worth doing if the amount you save in interest on a new mortgage deal is greater than that charge.
“You can use calculators online to help with your sums but you need to be 100% sure you understand how they are working out the figures and what their assumptions are,” said AJ Bell head of personal finance Laura Suter.
“A much better idea is to go to a mortgage broker with all your information, and they will be able to accurately work out what rate you’d need to secure to make it worth paying an exit fee.”
Emptying your savings account in order to pay the fee could also be risky, Laura added.
“If you leave yourself with no savings to fall back on, or have to pay fees to withdraw your savings, then it’s probably not the smartest move.”
“The cost of living is going to put pressure on a lot of people’s budgets this winter, which means having some savings to fall back on is sensible – once you’ve used your money to pay a mortgage exit fee, there’s no way of getting it back.”
Here’s how a savvy saver stashed away £20,000 in two years with a clever side hustle.
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