Should I pay ERC and fix for 5 years?

Stalemate1123

I have a 2yr fixed deal, which will end in Nov 2023. Last year, I got a mortgage offer from another lender when the rates started going up, and the 06-month validity of the offer is coming to an end at the end of this month.

The current 2-year fixed rate is 3.2% (95% LTV so it's high) with a ERC of roughly 4.5k. The new 5-year fix is at 3.89%. Monthly payments will go up by £60 which is affordable.

I know that no one has a crystal bowl but still thought I'll try asking for some informed opinions. Currently, I'm getting mixed advice - friends and family are recommending we go for it but one mortgage broker who I have used before is suggesting that I hold my horses till Nov. Utimately, the risk is mine and my tolerance for risk is relatively low as I have a toddler and we are planning for another one so looking for more advice.

Shall I pay the hefty ERC and fix for 5 years? 

Mortgage is for 427k for 35 years if it helps.

Thanks.

dougson

The hefty ERC would put me off, I'm guessing you might also need to factor in the fee associated with taking the new product? You will have to pay that when the fixed rate ends anyway (you don't want to pay 30+ years in SVR with a mortgage that big) but should probably consider about 25% of it is unnecessary expense based on the term left on the current deal.

I'm surprised that it only works out to be £60 a month difference, my mortgage is £160k over 26 years and each 1% is roughly £100 a month on the mortgage have you added the extra fees for the new mortgage and the ERC in to that calculation? 

Wouldn't like to guess where the 5 year will be in November, but with a 95% ltv I would be surprised if you get much cheaper than the rate being offered and I would guess the downside is it might be quite a bit extra, however the fees mean that you could potentially take a higher rate than 3.89% and still do better out of the deal.

Personally I think I would wait and see, but can definitely understand why you might prefer to opt for the security of a known 5 year rate with a toddler. 

RedFraggle

I'm at your LTV on a tracker as I had an offer accepted late October in the middle of chaos. If I could fix at your offered rate I probably would. 

BarleyGB

Mortgage fixed rates are higher, but down from their recent peak in October now, the 2-5 year trajectory (market expectation) is that rates will reduce.  That’s even the case if immediate base rate rises are likely, as the 5 year fixed deals are prices at what markets expect the average rate to be over the fixed term.

Do some sums,

1). What is the equivalent 95% 5 year fixed rate you could get now, I’d guess around 5.0-5.5%)?, what will be the total cost over 5 years (60 payments)

2) Equivalent 5 year rates could? be 0.5-1.0% lower by November (4.5-5.0%) what will be total cost over 5 years

3) What is the total 5 year cost of the 3.89% rate you have, plus ERC?

I’d guess given the size of your loan, option 3 is the lowest, it also offers the most certainty.  Options 2 and 3 are a guide to the equipment costs (do your own workings out) if you go onto a new rate now or November.  

If your 3.89% offer was at the time that rates started rising is could be a fairly marginal decision between options 2&3? 

Lastly, don’t forget to include any fixed rate product fee/s in your calculations

Note that the above is opinion, not advice.

Good luck.