Worth remortgaging and paying ERC?

geraint83

Good morning all,

Grateful for advice on my calculations below to see if it’s worth remortgaging early.

We took out a £283k mortgage in June 2015, for a 35 year term – fixed for 10 years at 2.99%, paying £1091pm at present.

Current amount owing is £250k. We currently have just over 3 years left of the fixed term.

ERC is 6% until end of June 2022, after which it’s 3% until end of June 2025.

I’ve seen the 10 year fix deal with Lloyds for 1.66%. I’d need to borrow £265k with them (£250k outstanding on current mortgage + £15k ERC), and over a 28 year term. The payment each month would be £986.

I could overpay by £105 each month (to bring monthly payments up to the £1091 I’m currently paying), and shave some time off the overall mortgage. I’d rather do this, to retain some flexibility, than get a shorter term for the new mortgage from the start.

When I last reviewed a couple of months ago, the benefits of remortgaging and paying the current ERC didn’t really make it worth the hassle – but I think the 1.66% Lloyds deal a good deal, and with BOE base rates currently rising, I suspect that it won’t be around too long.

Any advice

getmore4less

Ditch the fix calculations, based on switching when your ERC goes down to 3%. end June
Assume
£250k (would be nearer £248k in 4 months but use £250k for both)
3y to go 2.99%
10y new fix(secured at 1.66% £1k fee)
£1091 payment

Switch in 4 months

Mortgage	£250,000
payment	£1,091	ERC/FEE
rate	2.99%	£7,500
new rate	1.66%	£1,000
Time	Years	months
Left on current	0	4
New fix term	10	0
amount left after(months)		36
Start	rate	End
£250,000	2.99%	£232,393
£258,500	1.66%	£231,448
amount left after(months)		120
£250,000	2.99%	£184,623
£258,500	1.66%	£162,837
Switch when ERC £0
Break even rate needed no fee and fee)		84
£232,393	1.588%	£162,836
£233,393	1.513%	£162,837

You recover the ERC and assuming there would be the same fee in 3 years are ~£2k ahead  
rate needed in 3 years to better switching ~1.5%

if you can't secure the rate for June and switch end of Feb then it looks like.

Mortgage	£250,000
payment	£1,091	ERC/FEE
rate	2.99%	£15,000
new rate	1.66%	£1,000
Time	Years	months
Left on current	3	4
New fix term	10	0
amount left after(months)		40
Start	rate	End
£250,000	2.99%	£230,338
£266,000	1.66%	£236,285
amount left after(months)		120
£250,000	2.99%	£184,623
£266,000	1.66%	£171,690
Switch when ERC £0
Break even rate needed no fee and fee)		80
£230,338	2.125%	£171,690
£231,338	2.046%	£171,690

~£5k down at the change point and needing a rate 2% or less in 3y 4 month

then there is the switch now or wait option if you can't secure.

Mortgage	£250,000
payment	£1,091	ERC/FEE	ERC2
rate	2.99%	£16,000	7500
new rate	1.66%	£1,000
Time	Years	months
Left on current	0	4
New fix term	10	0
amount left after(months)		4
Start	rate	End
£250,000	2.99%	£248,121
£267,000	1.66%	£264,107
amount left after(months)		120
£250,000	2.99%	£184,623
£267,000	1.66%	£172,870
Switch when ERC £0
Break even rate needed no fee and fee)		116
£255,621	2.098%	£172,870
£256,621	2.046%	£172,871

You need to secure a 10y rate ~2% or better to be better off waiting for the 3% ERC.

geraint83

getmore4less said:

Ditch the fix calculations, based on switching when your ERC goes down to 3%. end June
Assume
£250k (would be nearer £248k in 4 months but use £250k for both)
3y to go 2.99%
10y new fix(secured at 1.66% £1k fee)
£1091 payment

Switch in 4 months

Mortgage	£250,000
payment	£1,091	ERC/FEE
rate	2.99%	£7,500
new rate	1.66%	£1,000
Time	Years	months
Left on current	0	4
New fix term	10	0
amount left after(months)		36
Start	rate	End
£250,000	2.99%	£232,393
£258,500	1.66%	£231,448
amount left after(months)		120
£250,000	2.99%	£184,623
£258,500	1.66%	£162,837
Switch when ERC £0
Break even rate needed no fee and fee)		84
£232,393	1.588%	£162,836
£233,393	1.513%	£162,837

You recover the ERC and assuming there would be the same fee in 3 years are ~£2k ahead  
rate needed in 3 years to better switching ~1.5%

if you can't secure the rate for June and switch end of Feb then it looks like.

Mortgage	£250,000
payment	£1,091	ERC/FEE
rate	2.99%	£15,000
new rate	1.66%	£1,000
Time	Years	months
Left on current	3	4
New fix term	10	0
amount left after(months)		40
Start	rate	End
£250,000	2.99%	£230,338
£266,000	1.66%	£236,285
amount left after(months)		120
£250,000	2.99%	£184,623
£266,000	1.66%	£171,690
Switch when ERC £0
Break even rate needed no fee and fee)		80
£230,338	2.125%	£171,690
£231,338	2.046%	£171,690

~£5k down at the change point and needing a rate 2% or less in 3y 4 month

then there is the switch now or wait option if you can't secure.

Mortgage	£250,000
payment	£1,091	ERC/FEE	ERC2
rate	2.99%	£16,000	7500
new rate	1.66%	£1,000
Time	Years	months
Left on current	0	4
New fix term	10	0
amount left after(months)		4
Start	rate	End
£250,000	2.99%	£248,121
£267,000	1.66%	£264,107
amount left after(months)		120
£250,000	2.99%	£184,623
£267,000	1.66%	£172,870
Switch when ERC £0
Break even rate needed no fee and fee)		116
£255,621	2.098%	£172,870
£256,621	2.046%	£172,871

You need to secure a 10y rate ~2% or better to be better off waiting for the 3% ERC.

Wow - thanks for that.

So, if I've understood correctly:
- If I wait until the end of my current term when there is no ERC, I need to secure a 10 year interest rate of 2% or lower (unlikely given current trends, but nobody has a crystal ball...)
- Applying for the remortgage now, and completing the switch in July when ERC is halved to 3% is better than completing a switch immediately - that makes sense, and I think a mortgage offer Lloyds is valid for around 6 months.

getmore4less

I didn't do the full secure now and switch end of June based on 4 months at 2.99%

The key take aways if you can do that....

You get your £7.5k back within the 3 years
You would need a new rate in 3 years around 1.5% if you did not switch.

It's the switch now with £15k ERC that needs 2% in 3y4m
Or
Switch now or wait for a deal you can lock in that needs to be 2% within 4 months.

….........

There is different set of calculations dealing with other fix lengths 

I might have missed some but even when 5y rates were hovering around 1% most 10 year were hovering around 2%.

dimbo61

Can you sign up to the 10 year deal with Lloyd's ASAP.
Rates are only going up at the moment 

geraint83

Thanks. I think I'll go for the Lloyds Bank offer - as dimbo61 says, rates are only going up at the moment, and it would be good to have certainty over how much we'll be paying for the next 10 years. Our current 10 year deal has worked well over the past 7-ish years, and I can't see 10 year rates going much lower.

Thrugelmir

geraint83 said:

I can't see 10 year rates going much lower.

The decade long era of cheap money is drawing to a close........ the only way now is up. 

geraint83

As an update on this, I had a video consultation with a Lloyds advisor on Monday afternoon, submitted the application with them on Tuesday - the credit check and valuation came back immediately - and then received the mortgage offer yesterday. I'm really impressed with how smoothly it went.

The mortgage offer is valid until 31 August, which means we can hold back until the ERC for our current fix halves to 3% on 01 July before completing the remortgage.

Thanks all for your help!

getmore4less

Major result.

1.66% 10y fix could be a bargain of the year for those that can make a 10y work.

geraint83

getmore4less said:

Major result.

1.66% 10y fix could be a bargain of the year for those that can make a 10y work.

Indeed. I’ve managed to reduce my remaining term down from 28 to 24 years thanks to the lower interest rate, keeping my monthly payments broadly similar