Money Insider: Repaying fixed-rate mortgages can be pricey

 

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.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

    £24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Business Analyst - Financial Services - City, London

    £50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

    SThree: Trainee Recruitment Consultant

    £18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

    Day In a Page

    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
    Public relations as 'art'? Surely not

    Confessions of a former PR man

    The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
    Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

    Bill Granger's luxurious sweet treats

    Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
    London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

    The mother of all goodbyes

    Paula Radcliffe's farewell to the London Marathon will be a family affair
    Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

    Steven Naismith: 'We know we must do better'

    The Everton forward explains the reasons behind club's decline this season
    Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

    Michael Calvin's Last Word

    Praise to Wenger for having the courage of his convictions