Homeowners are paying steep fees to get out of fixed mortgage deals before interest rates rise.
It may seem counterintuitive to try to lower bills by spending more. But it might be prudent if interest rates continue to rise as expected.
Mortgage costs have risen rapidly, ending the era of ultra-cheap loans.
Rising bills: Mortgage costs have risen rapidly in the last six months, ending the era of ultra-cheap loans.
Average five-year fixed rates have already reached a seven-year high of 3.37 percent, according to data analysts Moneyfacts. This could prove to be a major blow to borrowers when it comes to remortgaging.
The Bank of England’s base rate has risen to 1.25 percent, but analysts believe it could more than double in the next 12 months to 3 percent.
This means borrowers scramble to lock in cheap fixed rates before they’re gone, even if it means paying hefty penalties to close deals.
Yorkshire Building Society reported an 88 per cent increase 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 accept expensive fees. Dean Esnard, director of Magni Finance, reports that clients have paid fines of more than £6,000 to get a new five-year contract.
He says: ‘People are worried, most think rates will continue to rise. Paying an exit fee is covering that rates will be higher when your current agreement ends.’
Rhys Schofield of Peak Mortgages and Protection adds: ‘We’ve seen a huge increase in the number of customers wanting to pay early repayment charges and close a deal now.
I could see the rates would go up. I’m glad we did
Owner Barney Clarke
“At a time when people see all other costs skyrocketing, they’re looking for peace of mind.”
Barney Clarke, 48, a Wiltshire professor of business and economics, paid an exit fee of £1,400 to get out of his fixed mortgage deal early.
It had been locked in at a 1.9 percent rate that was due to end in August 2022. But wary of rising costs, it switched to a new deal in December.
Thanks to skyrocketing home prices, Barney and his wife qualified for a lower loan-to-value mortgage, earning them a five-year fixed rate of 1.33 percent.
This reduced monthly interest repayments by £68 and they will recoup the exit fee in 21 months. They were also able to reduce the term of their mortgage and pay off their debt five years sooner.
Barney says: ‘I could see rates going up. I’m glad we did.
Fighting inflation: The Bank of England base rate has risen to 1.25%, but analysts believe it could more than double over the next 12 months to 3%
When is it worth paying to get out of a mortgage early?
Deciding whether to give up a mortgage requires complicated sums, but a good broker can help.
The savings should have the chance to outweigh the cost of leaving, including additional fees and interest.
Mortgage prepayment fees are often calculated on a sliding scale that’s pricier up front, falling to about 1 percent over the past 12 months. The lower the fee, the fewer fees must increase to recover the cost.
Magni Finance has taken two fictional borrowers to show when it’s worth paying to get out and when it’s not.
The first has a £400,000 mortgage set at 2 per cent. There are 12 months left to execute the agreement and there is a 1 percent early exit fee.
The best five-year mortgage rate is 2.4 per cent, so the cost of getting rid of the deal is £5,600, an exit fee of £4,000 plus a higher interest rate for one year of an extra £1,600 .
If mortgage rates were to rise 1 percent over the next 12 months, the best offer could rise to 3.4 percent.
This means that if someone waits to re-mortgage they would pay £4,000 a year plus interest or £20,000 over five years.
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 set at 1 per cent. Again, 12 months left to run and a 1 percent exit fee.
The best five-year mortgage available here is 3 percent, since the borrower has less equity in their home. This means the total cost of leaving the mortgage is £9,000, an exit fee of £3,000 plus £6,000 additional interest for one year.
If we assume interest rates rise 0.5 percent over the next 12 months this time, the cheapest mortgage would become 3.5 percent.
So if the borrower had to wait to re-mortgage, they would pay £1,500 a year more and £7,500 over five years. This would be £1500 less than the sum paid to get out, leaving them out of pocket for him.
Rates would have to rise by at least 0.6 percent over the next year for the borrower to break even.
But no one knows what will happen to interest rates. Analyst opinions differ and borrowers should consider this.
Martin Stewart, director of advisers at London Money, says: “Trying to forecast rate increases is difficult and you also need to factor in any major life event.”
“One option is for borrowers to start remortgaging early to lock in current rates, as offers are typically good for up to six months.”
Our calculations do not reflect the fact that exit fees are typically added to a homeowner’s mortgage and therefore may also accrue interest over time. But brokers should consider this when helping you make a decision.
The best mortgage rates and how to find them
Mortgage rates have risen substantially as the Bank of England base rate has risen rapidly.
If you’re thinking about buying your first home, moving or remortgaging, or are a buy-to-let landlord, it’s important to get good, independent mortgage advice from a broker who can help you find the best deal.
To help our readers find the best mortgage, This is Money has partnered with independent broker L&C.
Our L&C-powered mortgage calculator can allow you to filter offers to see which ones best match your home value and deposit level.
You can also compare different fixed-rate mortgage durations, from two-year arrangements to five-year arrangements to ten-year arrangements, with monthly and total costs displayed.
Use the tool at the link below to compare the best deals, taking both fees and rates into account. You can also start an online application on your own time and save it as you go.
> Compare the best mortgage deals available now
Some links in this article may be affiliate links. If you click on them, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.