The Mortgage Clinic: 'I want to sell up but it will cost a fortune in fees'
Wednesday 30 May 2007
'I'm selling my house, but my building society tells me I'll have to pay them more than £2,000 – as I'll have to pay 3 per cent of my mortgage balance as a penalty. I bought the house in February 2006 on a two-year fixed-rate deal, and with that kind of fee, I'll end up owing more than the original loan, even though I've been paying it off for 16 months. Can this be true?' CM, by email
Fixed-rate mortgages are a trade-off. You know how much you'll pay for the next two, three or five years, but the deal is that you stick with the mortgage for that term. If you don't, you'll get stung by the early redemption charge.
From the point of view of the lender, it seems logical. They incur costs from arranging the loan on the wholesale financial markets – if you pay off your mortgage early, they can't lend that money to someone else.
Charging penalties also allows mortgage companies to offer very attractive rates. As Melanie Bien, director at mortgage brokers Savills Private Finance points out, base rates are now at 5.5 per cent and could rise to 5.75 per cent. Your fixed rate is below the base rate, so you have already saved money on your monthly interest bill.
That said, you may be able to avoid this charge – or even get the fee added to your new mortgage. First, check if you can "port" your mortgage to the new property. Almost all lenders allow this with fixed rates, as long as the property meets their valuation rules and your earnings can still cover the loan. This is likely to be your cheapest option, as the fee for transferring the mortgage should be quite small.
If you need a larger loan, talk to your lender or an independent mortgage broker. It could well be that they can offer a second chunk of financing, in addition to transferring your existing fixed rate. The additional borrowing could be on another fixed rate, or you could look at tracker or capped-rate loans.
Take advice, because you'll need to look at the cost of arranging new loans once your existing two-year fixed-rate mortgage expires, and these fees can be expensive.
If none of these options work, at least property prices have moved in your favour. "Prices have risen considerably since February 2006 when you bought your property, so you'll be able to cover the fee out of the extra equity in your home," says Ms Bien.
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