Homeowners pay exorbitant fees to get out of fixed mortgage deals early before interest rates rise.
It may seem counterintuitive to try to lower your bills by spending more. But it might be wise for interest rates to continue to rise as expected.
Mortgage costs increased rapidly, bringing to an end the era of extremely cheap borrowing.
Rising bills: Mortgage costs have risen rapidly over the past six months, bringing an end to the era of super cheap borrowing
The five-year average flat rates are already at a seven-year high of 3.37 percent, according to data analysts Moneyfacts. This can be a huge blow to the borrowers when they come to the mortgage.
The Bank of England’s base rate rose to 1.25 percent, but analysts believe it could double over the next 12 months to 3 percent.
This means that borrowers are scrambling to lock in cheap fixed rates before they fade away — even if it means paying hefty fines for leaving deals.
The Yorkshire Building Society has 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 advisors have also seen more borrowers gobble up expensive fees. Dean Isnard, director of Magni Finance, reports that clients have paid more than £6,000 in fines for a new five-year deal.
“People are worried — most think rates will continue to rise,” he says. Paying an exit fee is a hedge that rates will be higher when their current deal expires.
Rhys Schofield, of Peak Mortgages and Protection, adds: “We’ve seen a significant increase in the number of clients willing to pay early settlement and repair fees on a deal now.
I could see prices going up. I’m glad we did
Homeowner Barney Clark
“At a time when people are seeing skyrocketing other costs, they are looking for peace of mind.”
Barney Clark, 48, a business and economics teacher from Wiltshire, paid an exit fee of £1,400 for leaving a fixed mortgage deal early.
It had locked in at a rate of 1.9 percent that was due to expire in August 2022. But fearing rising costs, it switched to a new deal in December.
Thanks to rising home prices, Barney and his wife qualified for a subprime mortgage, which enabled them to secure a 1.33 percent fixed rate for five years.
This reduced their monthly interest payments by £68, and they will get their exit fee back within 21 months. They were also able to reduce the term of the mortgage and settle their debts five years ago.
“I could see prices going up,” Barney says. “I’m glad we did.
Fighting inflation: The Bank of England’s base rate has risen to 1.25%, but analysts think it could double over the next 12 months to 3%.
When is it worth paying to leave a mortgage early?
Deciding whether to opt out of a mortgage involves tricky sums, but a good broker can help.
The savings should have a chance to beat the cost of leaving, including additional fees and interest.
Mortgage early payment fees are often calculated on a sliding scale that is most expensive to begin with, having fallen to about 1 percent in the past 12 months. The smaller the fee, the lower the rates need to go up to recover the cost.
Magni Finance took imaginary borrowers to explain whether or not it was worth paying out.
The first has a £400,000 fixed mortgage at 2 per cent. There are 12 months left to run on the deal and there is an early exit fee of 1 percent.
The best five year mortgage rate is 2.4 per cent so the cost of letting go of the deal is £5,600 – an exit fee of £4,000 plus a year’s top rate of interest at an extra £1,600.
If mortgage rates rise 1 percent over the next 12 months, the best deal could rise to 3.4 percent.
This means that if someone waits to remortgage, they will pay £4,000 a year in interest or £20,000 over five years.
But if they pay to leave early, they will recoup the cost within two years and save £14,400 over five years (£20,000 to £5,600).
Next, we have a homeowner with a £300,000 fixed 1 per cent mortgage. Again, there is 12 months left to run and an exit fee of 1 percent.
The best five year mortgage available here is 3 percent because the borrower has less equity in his home. This means the full cost of letting go of the mortgage is £9,000 – an exit fee of £3,000 plus an additional £6,000 of interest over the course of a year.
Assuming interest rates rise 0.5 percent over the next 12 months this time around, the cheapest mortgage would be 3.5 percent.
So if the borrower waits to re-mortgage, he will pay £1,500 a year and £7,500 over five years. This would be £1,500 less than the exit payment, leaving them out of pocket.
Prices must 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. Analysts’ opinions differ and borrowers need to consider this.
Martin Stewart, Director of London Money Consultancy, says: “Trying to predict price increases is difficult and any major life events must also be taken into account.
“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 an exit fee is usually added to a homeowner’s mortgage, so interest may also accrue over time. But brokers should consider this when helping you decide.
Best mortgage rates and how to find them
Mortgage rates skyrocketed as the Bank of England’s base rate rose rapidly.
If you are looking to buy your first home, move or remortgage, or are a buy-to-let owner, it is important to get good 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 an independent, no-fee L&C broker.
The Mortgage Calculator backed by L&C allows you to filter deals to see which ones fit your home value and deposit level.
You can also compare different durations of mortgage rates, from two-year fixes, to five-year fixes and ten-year fixes, displaying monthly and total costs.
Use the tool at the link below to compare the best deals, factoring in fees and prices. You can also start an online application on your own time and save it as you move forward.
> Compare the best mortgage deals available now
Some of the links in this article may be affiliate links. If you click on it, we may earn a small commission. This 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 influence our editorial independence.