When You Should Switch Your Mortgage Early

If you're regretting your decision to go for a fixed rate mortgage, find out if there's anything you can do about it here.

Did you fix your mortgage rate last year? Are you kicking yourself now interest rates have dropped to a new low? You might be feeling green with envy at all those lucky borrowers who are enjoying dirt cheap repayments with rock bottom rates. But is there anything you can do to get in on the act?

If you fixed your mortgage rate last year you could be paying well over 6%, but some new fixed rate deals are now charging less than 4%. So you may be considering switching early to a low fixed rate deal before your current one has come to an end. But is this a good idea?

To figure this out, you need to look at three factors:

the size of your mortgage,
your current interest rate and
how heavy the early repayment charge (ERC) and remortgage fees are.

What is an early repayment charge?

Fixed rate mortgages usually come with early repayment charges (ERCs), which kick in if you switch to another deal while you're on the fixed rate. (Worse still, some ERCs actually last beyond the length of your fixed rate deal.)

The ERC is often charged as a percentage of the outstanding loan. It's quite common for lenders to deduct an ERC of 2% or 3%. On a mortgage of £200,000, a 3% ERC will set you back a whopping £6,000.

Normally, it would be sensible to avoid paying the ERC at all costs. But for some borrowers remortgaging now to a lower fixed rate could actually make good financial sense.

Let's take a look at some examples:

If you took out a two-year fixed rate mortgage around six months ago, the average interest rate would have been 6.71%. Today, one of the most competitive two-year fixes I can find for remortgages is 3.79% from NatWest/RBS. (Note you need to have an equity stake in your home of at least 25% to qualify for this deal.) So how much would you save by switching to this rate now?

Switching early - £200,000 mortgage with a 2% ERC

Original fixed rate mortgage		New fixed rate mortgage
Current rate	6.71%	New rate	3.79%
Current repayment	£1,376.78	New repayment	£1,047.58
Total paid over next 18 months	£25,630.02	Total paid over next 18 months	£18,856.44

Figures are calculated over 18 months as this is the length of time remaining on the initial fixed rate deal.

Total saved over 18 months by remortgaging: £6,773.58.

But what about the fees and charges?

Total fees for remortgaging a £200,000 mortgage with a 2% ERC
Product fee	£799
Other fees estimate (legal and survey fees etc)	£500
ERC at 2%	£4000
Total fees	£5,299

The total amount saved once the fees have been deducted from your initial savings (£6,773.58) is £1,474.58. So even with all this additional expenditure, you would still be significantly better off by switching early to the new rate of 3.79%.

And, of course, if you're lucky enough to have an ERC of less than 2% on your current deal, you would save even more by switching early.

Higher ERCs

But what if your ERC is more than 2%? Would you make any savings money then?

Total fees for remortgaging a £200,000 mortgage with a 3% ERC
Product fee	£799
Other fees estimate (legal and survey fees etc)	£500
ERC at 2%	£6000
Total fees	£7,299

An ERC of 3% would cost you £6,000. So this time the total fees would be £7,299 (including the product fee of £799 and other fees estimated at £500).

Remember you would only save £6,773.58 by remortgaging. So with a 3% ERC, switching early would actually cost you £525.42, so despite the fact that your fixed rate is higher, you would be much better off staying with your current lender.

So, unfortunately, remortgaging won't always save you money. As well as the ERC you might incur, it also depends on how big -- or small -- your home loan is. Take a look at the next example where this time your mortgage is only £100,000:

Switching early - £100,000 mortgage with a 2% ERC

Original fixed rate mortgage		New fixed rate mortgage
Mortgage loan	£100,000	Mortgage loan	£100,000
Current rate	6.71%	New rate	3.79%
Current repayment	£688.39	New repayment	£526.97
Total paid over next 18 months:	£12,391.02	Total paid over next 18 months:	£9,485.46

Figures are calculated over 18 months as this is the length of time remaining on the initial fixed rate deal.

Total saved over 18 months by remortgaging: £2,905.56.

But what about the fees and charges this time?

Total fees for remortgaging a £100,000 mortgage with a 2% ERC
Product fee	£799
Other fees estimate (legal and survey fees etc)	£500
ERC at 2%	£2000
Total fees	£3,299

Here it would actually cost you an extra £393.44 to remortgage now, even with a 2% ERC. This is because the product fee and other fees remain at the same fixed level making them relatively more costly on a smaller loan.

So again, the fees and charges wipe out the financial benefits of moving your mortgage early.

Lower rates

One final point: it is possible to find deals with lower rates than the Natwest two-year fixed rate I mentioned. Woolwich, for instance, has this week launched a super cheap home loan of just 2.29% fixed for 12 months with a reasonable fee of £995. Here the repayments on a £200,000 mortgage would cost you just over £893 a month. That's £483 a month less than you'd be paying on your 6.71% fixed rate.

But there's a catch (or two):

To qualify for the deal you'll need an equity stake in your home of a least 40%.
After 12 months, the deal reverts to a tracker at a margin of 2.29% above the base rate. Since we don't know where the base rate will be in a year's time, it's impossible to know whether you would be better off staying on your fixed rate or switching to this deal now.

So, as always, it's crucial to weigh up the costs and risks of any new deal fully before you switch. Don't be dazzled by lower rates - do your sums to figure out whether it truly is the best financial move for you.

Is it worth it?

As you can see from the examples shown, switching early is more beneficial for borrowers with larger mortgages and lower ERCs. But you'll only be able to reap the rewards of switching early if:-

Your existing mortgage rate is high relative to current rates.
You have sufficient equity in your property to qualify for today's lowest rates.
The ERC for repaying your old mortgage isn't too high.
The fees for the new deal aren't too expensive.

That said, if these criteria can be met then it may be worth thinking about remortgaging now. Just make sure you do your number crunching very carefully (or get a broker to do it for you), and include all the costs you'll incur. Watch out for some of the lowest rate deals because they sometimes charge extortionate product fees. These extra costs could make switching early pointless.

Remember you don't have to choose a fixed rate loan again. You might prefer to switch to a tracker mortgage instead. With the base rate at an all-time low, many borrowers are enjoying lower repayments than ever on this type of deal. But then you are taking a risk that your rate may go up, as well as down.

Stick or switch?

Unfortunately, switching early won't work for all borrowers. In fact, I suspect many of you will have to sit it out until your fixed rate deal ends. But at least you have the security of knowing your payments will not rise over this period, and that you are not paying any more than you originally thought you would.

If you are still thinking about switching to a new deal, make sure you read How I Picked My Mortgage first for a few more helpful tips.

And don't forget you can get a broker at our mortgage service to help you with all those sums, so you can decide whether staying put or remortgaging is a good move for you.

Good luck!

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