Is it worth paying early redemption fees to get better rate?

tallmum

Hi - I'm wondering whether it would be worthwhile paying the penalty for early redemption on existing mortgage to get a lower rate - I have a 5 year fix with Nationwide at 5.83% (locked in just before interest rates dropped in 2008!) - the penalty for early redemption is around £3000 but I'm not sure if I could recover this with a lower rate (looking to borrow ~£150k over a 10 year repayment - ~ 45% loan to house value)

Any advice gratefully received as I don't want to throw good money after bad and waste yet more! (I know I took a gamble on rates rising and am paying a premium for security)

Thanks

dunstonh

Is it worth paying early redemption fees to get better rate?

easy answer:
yes - if you are going to be better off financially by doing it.
no - if you are not going to be better off financially by doing it.

All you need to do is the simple job of working out which option is the most expensive over the remaining period of the deal (e.g. cost of monthly payments plus cost of early repayment/redemption vs cost of new monthly payments and cost of deal you purchase.)

powerwin

There's no simple way, you just have to do all the calculations, taking into account all the fees that will be applied by your present lender and the fees that will be applied by your new lender.

Rgds

noodle

I have just done this. I switched from a 5.73% fixed rate with about 2.5 years to run, to a 2.39% variable rate. I've paid a fee of around £1,800 for the privilege. Both the old and the new deal were with HSBC, who had no problem with me doing the switch. I would have done this a while ago, but needed to wait until I had the right amount of equity to lock into an attractive tracker deal. People without strong LTV's might find that they can't save much by going to a tracker.

I'm actually hoping to pay of my mortgage completely before the end of the year, but even if I wasn't this would be the right thing to do, given I'm confident that the base rate won't rise high enough over the next 2.5 years to erode my net advantage.

The thing to do is to add up the costs and benefits of switching, and consider the risk of base rate rises over the relevant period. The bigger the differential between the two rates, the safer you are. You also need to consider what level of flexibility you have in the event that base rates do suddenly shoot up.

Procrastinator333

tallmum wrote: »

Hi - I'm wondering whether it would be worthwhile paying the penalty for early redemption on existing mortgage to get a lower rate - I have a 5 year fix with Nationwide at 5.83% (locked in just before interest rates dropped in 2008!) - the penalty for early redemption is around £3000 but I'm not sure if I could recover this with a lower rate (looking to borrow ~£150k over a 10 year repayment - ~ 45% loan to house value)

Any advice gratefully received as I don't want to throw good money after bad and waste yet more! (I know I took a gamble on rates rising and am paying a premium for security)

Thanks

First one I looked at. HSBC. 5 yr fix. 40% depposit. 4.59%. That is a saving of 1.34% or £2,010 per year. So 2.5 Years of that is £5k. Booking fee for that product is £200. So £4.8k saving vs the £3k early redemption charge. You then have another 2.5 Years of fixed mortgage.

Or, if you think rates are going nowhere fast (As I personally do), HSBC lifetime tracker, 40% deposit. 2.39%. That is a saving of 3.44% or £5,160 per year. No booking fee. But then even to get back to the rate of your current fix, rates would need to rise 3.5%. Do you think that likely in the near future?

Imo, if you could take the pain of 6,7,8% rates, then it is a risk worth taking. If a few £'s more would tip you over the edge, then I would swap to a cheaper 5 year fix. But must surely be worth swapping for something. And they are just the first 2 mortgages I looked at....

tallmum

Thanks for your responses - they've convinced me that doing nothing (Nationwide loyalty!) is the wrong thing to do - it should be worth taking the hit on early redemption to access a lower rate.:)

dunstonh

tallmum wrote: »

Thanks for your responses - they've convinced me that doing nothing (Nationwide loyalty!) is the wrong thing to do - it should be worth taking the hit on early redemption to access a lower rate.:)

Have you actually done the calculation?

For many people it isnt worth moving because they dont recover the redemption charge and set up costs of the new deal before the end of the current deal.

tallmum

Thanks Dunston - I am going to work through the numbers before making the change - but based on the earlier post think I must be able to make some saving (I still have 2 years to go on current fix) - I think the responses here have made it worthwhile working through all the costs as there's a high probability I can do better.

Don't suppose it's likely that Nationwide would ofer me a better deal to avoid losing my business though

Thrugelmir

You also need to take a longer term view. As when your fixed term ends you'll go on to NW's BMR rate of BOE +2% for life. So the follow on rate is important with the new product. You'll never get back onto the BMR rate in the future.

So think carefully before remortgaging.

tallmum

Looking around now (as I probably should have done months ago!) there's a fee free HSBC lifetime tracker of bank rate +1.89% (with option to switch without ERC) - I suspect this must be an improvement for me (looks to be better than the longer term Nationwide rate as well)

MrsManda

For a quick glance of what you may be able to save use the ditich my fix mortgage calculator:
http://www.moneysavingexpert.com/mortgages/fixed-mortgage-calculator
Make sure you know whether the ERC is a % of the mortgage value or a fixed amount.
then as thrugelmir said, take a look at the longer view including whether you can continue to pay if the rates rocket before making any decisions.