Households could save thousands of dollars by paying off their mortgage now and paying prepayment charges.
The pace at which interest rates are rising means that waiting until a fixed term is over to remortgage may not be the best financial decision. Instead, locking in a lower rate now and paying part of the loan to leave a fixed deal can save homeowners thousands in the long run.
The Bank of England’s base rate is expected to hit 3% to 3.25% next year in a bid to tackle soaring inflation, according to the Center for Economics and Business Research, a think tank.
A mortgage borrower with a loan worth 75% of a £400,000 house could save £1,293 over the next two years if they ended their two-year fixed contract now and paid a mortgage fee. prepayment, according to an analysis for The Telegraph by estate agent Hamptons.
The savings are based on interest rates rising 1.25 percentage points next year, bringing the bank rate to 3% – at the lower end of CEBR’s forecast. The average two-year fixed contract is currently at 3.64%, but would rise to 4.89% if that happens. The owner’s monthly repayments would be £1,524 if they settled again today at 3.64%, compared to £1,735 if they waited for the discount rate to hit 3% and transactions to get even higher dear.
The scenario assumes a fixed prepayment charge of 1.25pc, which is offered by Nationwide, a major mortgage lender. Fixed reimbursement fees are more common on fixed two-year contracts, according to Hamptons.
If interest rates were to rise by 1.5 percentage points – to 3.25%, at the upper end of CEBR’s forecast – the savings for these households would be £2,342 over their new fixed two-year deal. years, despite prepayment charges.
Aneisha Beveridge, from Hamptons, said: ‘If a household is nearing the end of their mortgage next year and they think rates will be higher than they are today, it might be worth d ‘consider repairing it now and paying a prepayment charge.’
However, she warned that if interest rates fall towards the end of 2023, households due to have a mortgage then could be worse off getting a new deal now. Hamptons expects interest rates to peak late this year or early next year, potentially starting to fall again towards the end of 2023 to 2024.
Mark Harris, of mortgage broker SPF Private Clients, said: “We’re seeing more and more people get out of the patches and remortgage because they don’t want to wait 18 months when the current patch ends and then suffer a real payment shock.
But he warned owners to look at their personal circumstances. “Some people will have rates close to 1pc, and if they have a few years to use it, it might be a good idea to stick with what you have,” he said.
Mr Harris added that some lenders will have different prepayment charges that borrowers will need to consider if they want to break the deal. Many, especially on five-year contracts, have prepayment charges that start very high and decrease towards the end of the contract.
“If you had made this decision three months ago, it was probably the right thing to do, but will rates continue to rise? he said. “No one has a crystal ball. Only hindsight will tell if it’s the right thing to do or not, but if it worries you and keeps you awake at night, then it’s something to explore – but very carefully.