Homeowners are paying hefty fees to exit fixed mortgage deals early before interest rates rise.
It may sound counter-intuitive to try to cut bills by spending more. But it could be prudent if interest rates keep climbing as expected.
Mortgage costs have increased rapidly, bringing the era of ultra-cheap borrowing to an end.
Rising bills: Mortgage costs have increased rapidly over the past six months, bringing the era of ultra-cheap borrowing to an end
Average five-year fixed rates have already hit a seven-year high of 3.37 per cent, according to data analysts Moneyfacts. This could prove a major blow for borrowers when they come to remortgage.
The Bank of England base rate has risen to 1.25 per cent, but analysts believe it could more than double over the coming 12 months to top 3 per cent.
This means borrowers are rushing to secure cheap fixed rates before they vanish — even if it means paying steep penalties to leave deals.
Yorkshire Building Society reported an 88 per cent rise in the value of exit fees paid so far this year, compared to the same period in 2020.
Mortgage advisers have also seen more borrowers swallowing costly charges. Dean Esnard, director at Magni Finance, reports that customers have paid penalties of more than £6,000 to bag a new five-year deal.
He says: ‘People are worried — most think rates will keep rising. Paying an exit fee is hedging that rates will be higher when their current deal ends.’
Rhys Schofield, of Peak Mortgages and Protection, adds: ‘We have seen a big increase in clients wanting to pay early repayment charges and fix into a deal now.
‘At a time when people are seeing all other costs skyrocket, they are looking for peace of mind.’
Barney Clarke, 48, a business and economics teacher from Wiltshire, paid a £1,400 exit fee to leave his fixed mortgage deal early.
Inflation fight: The Bank of England base rate has risen to 1.25%, but analysts believe it could more than double over the coming 12 months to top 3%
He had locked into a 1.9 per cent rate that was due to end in August 2022. But wary of rising costs he switched to a new deal in December.
Thanks to soaring house prices, Barney and his wife qualified for a lower loan-to-value mortgage, which enabled them to secure a 1.33 per cent five-year fixed rate.
This reduced monthly interest repayments by £68, and they will recoup the exit fee in 21 months. They were also able to cut their mortgage term and clear their debt five years earlier.
Barney, says: ‘I could see rates would rise. I’m glad we did it.
Deciding whether to quit a mortgage takes tricky sums, but a good broker can help.
Savings must have a chance of beating the cost of leaving, including fees and additional interest.
Mortgage early repayment charges are often calculated on a sliding scale that is most expensive at the start, falling to about 1 per cent in the last 12 months. The smaller the fee, the less rates need to rise to recoup the cost.
Thanks to booming house prices, some borrowers may also find they can shift on to a lower loan to value
Magni Finance has taken two fictional borrowers to show when it is, and isn’t, worth paying to exit.
The first has a £400,000 mortgage fixed at 2 per cent. There are 12 months left to run on the deal and there is a 1 per cent early exit fee.
The best five-year mortgage rate is 2.4 per cent, so the cost of ditching the deal is £5,600 — a £4,000 exit fee plus a higher interest rate for a year at £1,600 extra.
If mortgage rates were to rise by 1 per cent over the next 12 months, the best deal may rise to 3.4 per cent.
This means if someone waits to remortgage they would pay £4,000 a year more in interest or £20,000 over five years.
Fees: Mortgage early repayment charges are usually calculated on a sliding scale that is most expensive at the start, falling to around 1% in the final 12 months
But if they pay to leave early, they would recoup the cost in two years and save £14,400 over five years (£20,000-£5,600).
Next we have a homeowner with a £300,000 mortgage fixed at 1 per cent. Again, there is 12 months left to run and a 1 per cent exit fee.
The best available five-year mortgage here is 3 per cent as the borrower has less equity in their home. This means the full cost of leaving the mortgage is £9,000 — a £3,000 exit fee plus extra interest of £6,000 over a year.
If we assume interest rates go up by 0.5 per cent over the next 12 months this time, the cheapest mortgage would become 3.5 per cent.
So if the borrower were to wait to remortgage they would pay £1,500 a year more and £7,500 over five years. This would be £1,500 less than the sum paid to exit, leaving them out of pocket.
Rates would need to rise by at least 0.6 per cent over the next year for the borrower to break even.
But no one knows what will happen to interest rates. Analysts’ opinions differ and borrowers need to consider this.
Martin Stewart, director of advisers London Money, says: ‘Trying to forecast rate rises is difficult and any major life events also need to be factored in.
‘One option is for borrowers to start remortgaging early to secure today’s rates, as offers are often valid for up to six months.’
Our calculations do not reflect the fact that exit fees are typically added to a homeowner’s mortgage and so may also accrue interest over time. But brokers should consider this when helping you make a decision.
