Choosing the right home loan isn't always a straightforward process. We all have different circumstances so it's never going be a case of one type of mortgage fits all. Most of us who opt for a discounted or fixed-rate mortgage will naturally focus on the interest rate and fee as we look to keep the upfront costs and monthly repayments to a minimum.
However, the latest Moneynet research shows it is just as important to check the costs of terminating your fixed-rate mortgage deal ahead of schedule, not something you're really contemplating when you sign up for your new mortgage, but a very important one, particularly when you realise potential cost implications.
An early repayment charge (ERC) will be detailed in your mortgage agreement and tells you how much of a financial penalty you'd have to pay to exit your deal before you reach the agreed maturity date. If you look at the five-year, fixed-rate products currently available as an example, many lenders will charge you 5 per cent of your mortgage balance to quit the deal in the first year, but in reality this is something you're quite unlikely to want to do.
The situation changes when you get to the last 12-18 months or so of your mortgage as you'll be taking more notice of the prevailing interest rates and starting to consider your options for when your current deal finishes.
This is where the difference in ERC charges is important, as in the final 12 months in a five-year fixed deal, some lenders such as HSBC, Metro Bank, The Co-operative Bank and Britannia will only charge 1 per cent of your balance as a get-out fee, whereas Northern Rock, Santander, and Nationwide Building Society are among those who will demand a hefty 5 per cent.
To give you an idea of the cost differential, someone with a £175,000 mortgage having to stump up a 5 per cent exit penalty would be faced with an eye-watering bill of £8,750 compared with a far more palatable £1,750 payable to a lender charging just 1 per cent.
For those with a smaller loan the costs will not be as great – however, the potential savings of moving to a lower rate will be smaller too, so the size of the ERC is still an important factor.
It's understandable that lenders will impose a high ERC at the beginning of a fixed mortgage, but to impose such steep fees in the final year of the deal is excessive and makes it highly unlikely that you would be financially better off switching to a new deal, even if it was at a considerably lower rate.
At the moment there will be people getting itchy feet as they see some of the very competitive, five-year deals on the market start to disappear, wishing they could move, but restricted by the high get-out costs.
Next time you're shopping around for a new fixed or discounted mortgage, don't be swayed purely by the headline rate and product fee, if there's a sizeable exit charge payable in the final year or so of the deal, it may be worth paying slightly more each month just to buy yourself some additional flexibility further down the line.
Co-op offers for First-Time Buyers
With the stamp duty holiday for first-time buyers coming to an end today, Co-op has launched some fee-free mortgages.
The bank says it will lend up to £360m to first-time buyers in 2012, and the competitive pricing of these deals suggests it really means business.
There are two new products available from the Co-op – a three-year, fixed-rate at 4.69 per cent, and a lifetime tracker, for those who only have a 10 per cent deposit.
The lifetime tracker, at base rate plus 4.09 per cent, makes the 4.59 per cent pay rate the same as a deal which is currently on from HSBC, but the latter charges a £599 fee.
If your budget is a little on the tight side, a fixed-rate mortgage makes sense as at least you'll know your payments won't increase for the term of the deal, a key factor for many new homeowners.
First-time buyers are a vital part of the mortgage market so it's good to see lenders trying to give this sector a boost.