When is it worth paying early redemption charges on a fixed-rate mortgage?

• If the Bank of England rate hits 1.5%, it could mean more than a third of people with variable-rate mortgages face difficulties.
• Meanwhile, with 1.5 million fixed-rate mortgages set to expire this year, more than a third could face financial stress if the base rate hits 1.5% or higher.

SPECIAL REPORT

The mortgage and landlord possession statistics: January to March 2022 are out. They paint a bleak picture, but do they also warn us of what’s to come if interest rates rise and a recession hits the global markets? Is it better to switch your mortgage deal now and suck up the early redemption fees?

“Fortunately, many homeowners are on exceptionally low fixed rates and that will support their ability to maintain payments,” says Ross Boyd, founder of the always-on mortgage comparison platform, Dashly.com. 

“It’s what happens when they come to the end of their fixed rates that matters now. Many will be in for a serious rate shock if rates continue to rise, something that will be exacerbated if inflation is still well above target,” says Boyd.

This week’s rate rise could push mortgage payments up by over £40 and put up to one in ten of those on variable rate mortgages under financial pressure, according to Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.

Even this small increase could put one in ten people on variable rate mortgages under financial pressure.

“If rates continue to go up, and the Bank of England rate reaches 1.5%, more than one in three could face real financial challenges. And while those on fixed-rate mortgages are protected, for now, 1.5 million face the end of their term this year, and over a third might struggle with the extra cost,” says Coles.

Assuming rate increases are passed on in full, someone with a 25-year £300,000 repayment mortgage, on an average SVR of 4.71%, could find themselves paying £42 more each month after yesterday’s rate rise. If the Bank of England rate was to subsequently increase to 1.25%, they might pay £88 more a month overall, and if it went to 1.5%, in total, they might pay £132 more.

Those on an average two-year tracker of the same size and duration could see marginally smaller rises, but it could still be £38 this month, £75 at 1.25% and £114 at 1.5%.

Is it smart to lock in new fixed-rate mortgages?

Three-quarters of mortgage holders have protected themselves by opting for a fixed-rate mortgage. And while they’ll be reaping the benefits during the fixed period, it means they’ll feel the impact in one harsh blow when their mortgage expires.

“We are not yet seeing borrowers missing mortgage payments. This is because most of them are on fixed-rate mortgages and their payments have not changed,” says Joshua Gerstler, chartered financial planner at Borehamwood-based The Orchard Practice.

“However, we are likely to see an increase in missed payments once people reach the end of their fixed-rate deals and find that their monthly repayments are much higher due to the increase in interest rates,” he says.

According to Hargreaves Lansdowne, someone remortgaging at the end of a two-year fix could see their monthly payment increase by £61, causing financial stress for more than one in ten. If they locked into a new deal after another 0.25 percentage point rise it could push their payments up £97, and if rates rose yet another 0.25 percentage points, it could add £134 to the bill – when more than one in three people could struggle to afford the extra costs.

But if rates are only going to rise over the course of the next year, should those in the last year of a fixed-rate deal consider moving deals now?

YourMoney.com gives an example of how paying those early redemption charges aren’t always a bad idea, switching to a lower rate could still save you thousands.

If you are two-and-a-half years into a five-year fixed-rate mortgage that you took out at 80% loan-to-value (LTV) — and that during that initial two-and-a-half years not only has your mortgage balance decreased but the value of your home has risen by 10%.

“The combination of a lower mortgage balance and increased equity in your home means that you are now eligible for a mortgage below the important 75% LTV threshold, which has a much lower interest rate than the 80% LTV mortgage you are on.

“The interest rate is so much more competitive, in fact, that even if you pay off the early redemption penalty of, say, £5,000, switching to the more competitively priced mortgage would save you £8,000 during the final two-and-a-half years of your mortgage term — and leave you £3,000 better off overall,” YourMoney reported.

New lender tactics to avoid repossessions

Scott Taylor-Barr of Shropshire-based broker, Carl Summers Financial Services, says with rising interest rates and inflation doing damage to people’s incomes, we are bound to see an uptick in repossessions somewhere along the line.

“My advice to anyone that finds themselves struggling is always the same, namely speak to your lender. The earlier you can get the lender’s assistance, the easier and less stressful the whole experience will be. Lenders have entire teams set up to help support you with payments, as long as you are prepared to work with them and prioritise your mortgage payments.”

Taylor-Barr says mortgage borrowers should expect to be asked to cancel non-essentials like Sky TV and Amazon, as well as getting in touch with other lenders you may have, such as car finance, personal loans and credit card providers to see what they can do to reduce your repayments whilst you get yourself back on an even keel.

“Please remember that no one wants to come and repossess your house, that is the very last thing a lender wants to do, they would rather work with you to find a way to help you pay them back, so take them up on that offer of help,” he says.