HOMEOWNERS could save hundreds of pounds by swapping to a cheaper mortgage – even if they’ve not come to the end of their current deal.
Moving to a lower rate mortgage is one of the biggest ways households can chop monthly bills, while bagging savings worth thousands over the entire loan.
Stinging exit charges tend to put borrowers off looking for a better deal before a fixed rate period ends.
This is the amount you pay for leaving a fixed deal before it officially ends.
These fees are typically based on a percentage of the loan outstanding and often reduce further along in the deal.
For example, on a five-year fixed deal, you might have an early repayment charge of 5% of the loan if you exit in the first year, falling to 4% in the second year and so on.
If you had £150,000 owing on your mortgage, a 5% exit fee would be £7,500.
A 1% fee would be £1,500.
Yet some homeowners could find it is worth paying the lender’s early exit fee because of the savings that come with a cheaper rate.
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This is because mortgages are currently very cheap by traditional standards.
On top of that, soaring house prices mean many homeowners could qualify for an even cheaper rate.
Home values have jumped by around 27% over the past five years, according to Halifax.
When the value of your home goes up but your mortgage borrowing stays the same, the amount of equity you have in the property goes up.
And this means that borrowers could get a cheaper mortgage, even when they factor in the lender’s exit fee from their current deal.
For example, a borrower who had a deposit of 10% when they took out a £262,000 five-year mortgage at a rate of 2.99% in January 2020, could expect to pay a 1.5% exit fee of £3,693, according to calculations by mortgage comparison site Dashly.
However, an increase in property value could mean the borrower now qualifies for a 75% loan-to-value (LTV), allowing them to secure a three-year rate of just 1.79%.
Monthly repayments in this case would reduce by £149, for an overall saving over three years of £1,671 after the exit fee.
The borrower would save more over the duration of the mortgage by repaying the loan down faster each month at the lower rate.
Someone with a smaller loan and nearer the end of a deal is likely to pay the smallest fees.
Searching the market for the best rate and working out whether it pays to switch can be difficult.
But a good mortgage broker can help borrowers do this.
Ross Boyd, founder of Dashly.com, said: “It’s a myth that paying an early repayment charge automatically means you lose out financially.
“In many cases, it can save you thousands of pounds, if not more.”
David Hollingworth from broker L&C added: “It’s always worth keeping things under review as rates shift, and if rates drop it could open up the chance of switching to save even if there’s an early payment charge to pay. It needs some careful number crunching though.”
Our mortgage repayment calculator can how help you work out how much you can afford to borrow.
Plus, here are the banks putting their mortgages up – and how to avoid it.
And a property auctioneer reveals his top tips for buying a home at auction.
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