How 300,000 homeowners could end their mortgage nightmare
The estate agency Hamptons said that homeowners with at least 40 per cent equity who took out a fixed rate mortgage at 5.25 per cent or more two years ago — or 5.79 per cent if they were a first-time buyer with a 10 per cent deposit — could save enough by switching deals to make it worth paying an early repayment charge and any new mortgage fees.
Mortgage rates have soared over the past four years, from historic lows of less than 1 per cent in late 2021, just before the Bank of England began increasing its base rate of interest from an all-time low of 0.1 per cent in December 2021. Bank rate then rose 14 times to reach 5.25 per cent in August 2023 before falling more slowly to hit 4.25 per cent in May.
Mortgage rates had been rising but then surged in the aftermath of the Liz Truss mini-budget in September 2022 and went even higher the following summer because of worries over persistently high inflation.
The average five-year fix at 60 per cent loan-to-value (LTV) — peaked at 5.74 per cent and the average two-year fix peaked at 6.22 per cent, according to the Bank of England.
Rates have not returned to their previous lows. The average five-year fix at 60 per cent LTV last month was 4.15 per cent and the lowest rate now is 3.87 per cent from Santander. But they have fallen enough for it to make it cheaper for some homeowners who are a few years into an expensive fix to save by exiting early.
Early repayment charges are paid as a percentage of the outstanding loan. They sometimes remain the same throughout a loan's fixed term but typically reduce with the term. For example, the charge can be 5 per cent in the first year of a five-year fix, then fall each year to 1 per cent in the final year. The charges can be paid upfront or added to the new mortgage, where they will incur interest over the loan's lifetime.
Repayments on the average 5.74 per cent five-year fix two years ago would be £1,257 a month on a £200,000 25-year mortgage. By now a homeowner would have reduced their loan to £192,378. To get out of that deal after two years would cost £5,771, assuming that the loan had a 3 per cent fee.
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If you were able to get the lowest rate on the market of 3.87 per cent, repayments would be £1,054 a month on a 23-year loan. That's £203 a month less than sticking with the old deal, a £7,308 saving over the three years that were left on the old deal. This would outweigh the exit fee and the £999 fee for the new mortgage, and leave you £538 better off.
Aneisha Beveridge from Hamptons said: 'Historically, hefty early repayment charges have meant that it's rarely made financial sense for borrowers to exit their mortgage deals ahead of schedule. But the sharp spike in mortgage rates a couple of years ago, followed by their recent descent and the return of sub-4 per cent deals, has created a window of opportunity.'
Hamptons' analysis suggests that those who fixed between July and September 2023 would, on average, be better off paying the fee. There were 108,380 five-year fixes taken out in those three months, according to the trade association UK Finance. Five-year fixes made up about 47 per cent of all new deals in that time.
This does not include product transfers, where a customer takes a new deal with their existing lender. UK Finance does not provide data on the length of product transfers, only how many there were, but if the same proportion of product transfers were taken on five-year terms, it would increase the total number of five-year fixes taken out in those three months to 295,880.
Beveridge said: 'There's now a significant group of homeowners who locked into five-year fixes in the summer of 2023 who could save money by remortgaging, even after factoring in those exit fees. This is even though rates remain higher than the ultra-low levels we saw in the decade before 2022.'
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A mortgage broker will usually not recommend paying an early repayment charge unless all the maths, including fees, is in your favour. This means it can be hard to get advice on situations such as what happened in 2022, when rates were rising and homeowners who had years left to run on cheap deals were wondering if they should pay to get out early to avoid a much bigger shock when they eventually came to remortgage.
Chris Sykes from the mortgage broker MSP Financial Solutions said: 'You also need to consider things like fees that you paid to set up the mortgage — solicitor, lender, broker or valuation fees. Are you paying them all again to refinance now? The maths isn't as simple as 'we can save 1.1 percentage points for the next two years and we can pay a 2 per cent exit fee to do that, so it makes sense'.
'I think it could be good advice to break a product if the maths stacks up to, you just have to be careful how you do your maths.'
Have you paid an exit fee to get out of an expensive mortgage deal? Let us know in the comments
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