House Doctor: 'Can we quit our fixed-rate deal?'
Wednesday 20 May 2009
Question: Should we abandon our fixed-rate deal? We've a 6.29 per two-year fixed-rate with Britannia Building Society taken at the end of October 2008, and really regret paying such a high rate on our £155,000 repayment mortgage: will it be worth paying the 2 per cent exit fee to try for a cheaper two-year fixed elsewhere? We've a loan-to-value of 85 per cent.
Answer: You, like plenty of borrowers today, are suffering a severe form of mortgage 'vertigo'. Stranded high up on steep rates taken out before the Bank of England pushed base rate from 5 per cent to 0.5 per cent over the staggering space of just six months, it's horrifying to watch while fellow borrowers who simply had the good fortune to remortgage seven months after you pick from a selection of rates way, way below yours.
To cure your affliction and see if you should act, you'll need to crunch some very precise numbers, says David Hollingworth at London & Country mortgage broker.
"It's vital to work out whether, by moving to a new lender, you will get back the cost of the two per cent early repayment charge (ERC) – the cost of leaving your current deal – over the remaining period of your new deal," he says.
"On top of this, you've also to factor in the costs for setting up the new mortgage such as arrangement and valuation fees."
All of which sounds like a tall order, warns Melanie Bien of Savills Private Finance.
"If your ERC penalty is around £3,100, you need to work out whether the savings you could make by switching are high enough to cover this cost and the arrangement fee on your new deal."
For a two-year fixed deal, she adds, you can get around 5.25 per cent with Ipswich building society at an 85 per cent loan to value (LTV) mortgage: but it carries a £1,045 fee.
"This would work out at £968 a month compared with the £1,064 you are currently paying – a saving of £96 a month – but this wo't be a big-enough saving over two years to make it worth your while."
Staying put is your best option, she stresses, a view echoed by Andrew Montlake at Coreco.
"Competitive mortgage rates are still few and far between at 85 per cent LTV, so it's better to stay where you are at present and review the situation in six months."
To help, London & Country have developed an online calculator to suggest the target interest rate needed for any new deal to make it worth your while at www.lcplc.co.uk/calculators/early-repayment-charges, else call a mortgage broker and ask them to do all the maths.
One alternative could be to first reduce your LTV and then secure a better rate: the lower the LTV, the lower risk you represent to a lender and the cheaper the interest rate.
You can do this by using savings to overpay on your home loan – but this is only worth trying if you've enough savings to spare without putting your wider financial plans at risk.
It's also worth remembering that you'll also need a decent credit rating, to bag the best rates available.
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