Should I exit my mortgage early and pay a penalty?

kwmlondon

I have a fixed rate mortgage until Jan 31 2016.
If I exit the mortgage end of Jan 2015 I will pay a £4,000 fee.
If I leave in June 2015 I will pay £2,000.
Come Jan 31 2016 it won’t cost me anything.

My concern is that at the moment there are some very good fixed rate deals. I can get a fixed rate of under 3% now to activate Jan 31 and guarantee me a low interest rate for the next 5 years before the predicted increase in base rates.

I’ve done some calculations to see how much I’d have to pay at different rates:
At a fixed rate of 3% £926 a month/£55,560 over 5 years
At 3.5% £969 a month/£58,410 (£2850 more than at 3%)
At 4% £1,102 a month/£60,720 (£5,260 more than the 3% rate)

This is my quandary. If I take out a new mortgage in February I’ll likely have to pay some kind of fee for the privilege to the new lender, and an early termination fee to my current building society so that would be in the region of £5k. However, with interest rates likely to increase this could be a very shrewd move.

About three months ago the best fixed rate deals were about 3.19%, the best one’s are now from 2.85% (although big fees). I’m worried that towards the end of next year there won’t be any such deals available and I’ll have to take whatever’s going, but fixed rate deals will have to be more than 4% to make it worthwhile.
I’ve got three options:
1. Bet on 5 year fixed rate deals in Jan 2016 being over 4% and arrange a mortgage NOW
2. Wait until summer next year and hope there are some good 5 year fixed rate deals (and that the base rate hasn’t gone up that much).
3. Leave it until the end of next year and hope that fixed rate deals are not above 4%

There’s a lot of hoping and betting going on here – whichever option I take I’m taking a gamble.


What would you advise?

Typhoon2000

Fixed rates are are based on what the markets think the cost of money going forward would be. So if the markets think the cost of borrowing is going to go up next year or over the term, this will already be reflected in the fixed rate deals you get now.

So what you are hedging against by fixing now is protecting against an unexpected raise in borrowing rather than a expected rise interest rates.

kwmlondon

I get what you're saying, but at the moment fixed rate deals are at an all-time low. If the base rate goes up gradually (which is what is expected) then it follows that fixed rate deals will be offered at higher interest rates to reflect the cost of borrowing being higher further down the line again.

I.e. markets expect interest rates to be higher in two years. In two years the offers will reflect the fact that they anticipate rates being higher again, so I have the opportunity to mitigate against that now, but at the cost of exiting my mortgage early and paying the associated fees.

Aaaaaaarrrrrrrrrrrrrrrghhhhhhhhhhhhhhhhhhhhhh!!!!

kwmlondon

At the moment I have two bits of mortgage: 99423 + 69126 = £168,550

I did some sums. At 3% over 5 years I’d pay £926/month with a total of £55,560
If I could only get a 3.5% deal I’d end up paying £969/month total of £58,410 which means I’d pay £2,580 more over the 5 years.
If the best rate I could get was 4% then it would mean me paying £1,012 a month, £60,720 total over 5 years and paying £5,156 more.

I think that locking myself into a deal of 2.79% on Jan 31st would be a good idea, even if it does cost me £4k in exit fees and £1,600 in arrangement costs.

Thrugelmir

Will your current mortgage provider allow you to overpay? £6k or so in fees could be used to reduce it.

kwmlondon

Thrugelmir wrote: »

Will your current mortgage provider allow you to overpay? £6k or so in fees could be used to reduce it.

They do, but don't forget that I'm going to have to shell out some £1,500 when my fixed rate term comes to an end anyway to get a new fixed rate deal, unless I stay with Newcastle and they are no longer anywhere near as competitive as some of the others out there.

The quandary is to grit my teeth and pay exit fees to get a really good deal on the mortgage now or risk leaving it until the term ends by itself and face a market that has much higher fixed rate borrowing costs.

One option I'm going to ask my IFA about is paying the £99 booking fee now to get a fixed rate deal but then, if rates haven't gone up by, say, January, apply for a new mortgage.

Would applying for a mortgage six months apart set warning bells sounding? I'd have thought it's the kind of thing people have to do when their house sale falls through.

getmore4less

You are not doing the sum right to compare mortgages.

You add the costs set the payments the same and see whats left.

Adding up what you pay does not give you the right answer.

Without knowing your current deal no one can help with the calculations.

kwmlondon

getmore4less wrote: »

You are not doing the sum right to compare mortgages.

You add the costs set the payments the same and see whats left.

Adding up what you pay does not give you the right answer.

Without knowing your current deal no one can help with the calculations.

Thanks, I appreciate that, however my current deal really isn't the issue at all. I would not save any money - the exit fees are much greater than any potential saving in terms of the current loan. I've done the sums on this and nailed that question ages ago.

My whole question revolves around the deal I can get now on a fixed rate mortgage versus what I could potentially get in either June 2015 when the fees go down to £2k or January 2015 when they end all together.

Does this make sense to you?

amnblog

You need to decide if the rates available are going to be over 1% worse in January 2016. You are looking to pay a 1.2% charge to get out next summer or 2.4% to get out early in 2015.

kwmlondon

amnblog wrote: »

You need to decide if the rates available are going to be over 1% worse in January 2016. You are looking to pay a 1.2% charge to get out next summer or 2.4% to get out early in 2015.

Thanks.

Yup. I'm a very cautious person when it comes to finances. I'd rather pay over the odds and have certainty than risk being in an unknown situation further down the line which is why all my instincts tell me to get the great deal on offer now and swallow the fine.

getmore4less

if you don't work out how much smaller the mortgage will be by using the fees to overpay you won't be able to work out the rate you could go to without losing money. That rate could be higher than the predicted rises so you are mitigating a nonexistant risk.

whatever you do you only fix for a short term so there is unknown on the horizon