When searching for a mortgage, many borrowers are keen to lock in a fixed-term rate to give them stability and certainty as to what their repayments will be for the foreseeable future. The trade-off for this is a lack of flexibility, as breaking your mortgage during a fixed period will generally lead to a hefty fee. However, a lot can happen in five years—sometimes, breaking your mortgage early can save you money, so it’s worth considering your financial situation if you have any concerns about your current product.
When should you consider breaking your mortgage?
If you have paid down a decent chunk of your mortgage, meaning you are now in a lower loan-to-value (LTV) bracket, it could be worth breaking your mortgage early because you might be able to lock in a much better interest rate. Speak to a mortgage broker and do the sums; although you may have an Early Repayment Charge (ERC) of say, £15,000, you could save significantly on a monthly basis. With interest rates set to creep steadily upwards over the next few years, now is a good time to consider remortgaging.
You may also consider breaking your mortgage early because your personal circumstances have changed, and you need to refinance before rates go up instead of waiting another few years. For example, we have a client whose workload has reduced simply due to government changes impacting the industry within which she works. This client is now considering her options as she is worried she has an asset she can’t afford. However, 5-year fixed rate mortgages are cheaper now than they were three years ago, so it’s worth weighing up whether exiting your product early, and paying the ERC, is the cheapest option.
For example, the client in question had a 5-year fixed rate of 3.24% taken out three years ago, but could now re-mortgage for at a sub-2% rate.
Even with the 2% charge for breaking the mortgage early, and valuation, legal costs, and lender fees, the saving could be enough to make it worthwhile.
This is why breaking now could be the cheapest option. You’ll have peace of mind over a longer period of time, and you could even use the remortgage as a chance to release equity for home improvements. There’s also a chance borrowers will be in a better position to take out an interest-only facility for more flexibility.