Remortgage with an early repayment charge on a fixed rate is a common dilemma. As interest rates have recently increased, many homeowners are deciding to remortgage, even if it means having to pay an early repayment charge (ERC).
It’s vital to keep in mind that the terms and early repayment penalties will change every time you refinance. For instance, getting a mortgage with a lower interest rate than your existing one does not ensure that you would save money. In addition, it’s not always preferable overall to avoid an early payback fee.
An early refinance is what?
When a remortgage occurs early during a fixed term, an early repayment charge (ERC) is frequently assessed. You will normally have a fixed rate that is discounted for a predetermined period of years when you take out a mortgage. Your mortgage term is known as this, and when it expires, interest rates frequently increase. Homeowners switch contracts as a result to continue paying less.
Remortgaging early may save you money, even if you have to pay fees, as each mortgage contract is different. However, depending on your current contract and the new deal you’re offered, waiting until your fixed term expires might be a better alternative.
A fixed-rate mortgage: what is it?
You receive a fixed interest rate for a predetermined amount of time with a fixed-rate mortgage. Depending on the lender, your interest rate is normally fixed for a period of time between two and five years, although it may be fixed for a longer period. For instance, your interest rate would be fixed at 2% for three years if you had a three-year fixed mortgage.
Fixing your interest rate gives you security because you know that throughout the fixed time, your mortgage payments won’t go up. You can budget as a result of this. The interest rate switches to a standard variable rate (SVR), which is often much higher than a fixed rate, when your fixed rate expires. Therefore, it’s frequently advised to switch to a lower rate before a deal expires.
How much does paying off a mortgage early cost?
When refinancing early, you must take into account the following three costs:
- Fees associated with early mortgage repayment
- The price of opening a new mortgage
- Your updated mortgage terms and rate
- An early repayment fee is what?
There will be what is known as an early repayment fee (ERC) from many lenders. If you decide to pay off your mortgage early, you probably have to pay this. This is applicable to all mortgage types, but is particularly true for fixed-rate, capped-rate, and cash-back loans.
Lenders impose early repayment penalties, which are enforceable conditions of your mortgage. This is done by lenders as insurance against potential financial loss from early mortgage termination. This is due to the fact that lenders can afford to lend since they base their interest rates on the full mortgage period. Lenders can then use an ERC as a safeguard to recover any damages.
The amount you owe to your lender can also be used to calculate an ERC. The size of your ERC ultimately depends on your lender and the conditions of your specific mortgage.
If I don’t have a set term, may I remortgage?
You might be able to remortgage with little or no cost if you are not in a fixed term. It’s crucial to calculate the cost in advance because an early payback fee can be thousands of pounds. If so, it would be wiser for you to wait until your fixed-term mortgage expires before remortgaging.
Why could I choose to refinance early?
It’s always a good idea to start by figuring out the total cost of your current mortgage and compare it to a new offer. It’s crucial to take costs like early repayment penalties into account. You can decide whether to change deals or stick with your current contract after calculating your mortgage.
Switching lenders may be a smart move if an early remortgage will save you money. Additionally, your present lender might provide better terms than what you’re now receiving.
What is the price to begin a new mortgage?
Starting a new mortgage usually has the following costs:
- Fees for arrangements
- Fees for surveys and valuations
- Legal costs
- Booking fee or reservation
Some mortgages might cover all or some of the aforementioned expenses. Free legal services or even free valuations may be included as part of other transactions. Nevertheless, each expenditure will add up, so you must figure it out. Along with that, there is also the price of breaking your arrangement early. The cost-effectiveness of initiating a new mortgage can then be determined.
When you’ve tallied up all the associated expenses, the ideal choice ought to be obvious. You should speak with a knowledgeable broker who can do this for you. We’ll be able to evaluate the costs of various mortgages and compare hundreds of offers.
Additionally, keep in mind that even if you wait until after your term has ended to refinance, you will still be charged to begin a new mortgage. You won’t save money on any fees other than the early repayment fee.
Is it possible to avoid an early payback fee?
If your fixed mortgage term is about to expire, you might be able to lock in a rate six months in advance. Then, when you’re able to, you can remortgage and agree on a higher rate. The perk in this situation is that you ought to be able to refinance without having to pay early repayment penalties.
Check with each lender in advance as some will only let you lock in a rate for three months in advance. You can also get assistance from our consultants on this. It might be advantageous to lock in a mortgage rate in advance, particularly if rates are low or you anticipate an increase in interest rates. However, there are dangers associated with deciding on a tariff in advance.
To hold a mortgage agreement, lenders often impose a booking fee or an administrative fee. By doing this, you run the risk of losing the fees you’ve already paid if you decide to withdraw later. This may occur if better prices become available after you paid a charge to seal a transaction that is now unfavourable. Furthermore, you’ll probably incur cancellation fees if you decide to forego the deal you paid for.
Before agreeing to a new mortgage, it is advised that you consult with an expert. We’ll be able to let you know which way the market appears to be moving. This is due to the fact that we communicate daily with lenders and mortgage rates.
Remortgage with an early repayment charge, things to think about beforehand
In addition to the associated charges, there are additional things to think about if you’re considering a remortgage. Before submitting an application to a lender, it is a good idea to look into the following:
- Your income and ability to pay
- The value of your property
- A debt reduction to value
- Your credit rating.
You should be on the right track to successfully refinance if you keep these things in mind, as well as the charges associated with starting and ending a mortgage. Additionally, you could be able to save a significant amount on any upcoming mortgage payments.
Can you remortgage your home to get the money you need?
Each lender will have a different method for doing its affordability checks. Some lenders are less rigorous about remortgages than others, though. For instance, while some lenders may only give up to three times your annual income, others may lend up to five times your income.
It doesn’t follow that all lenders will accept your mortgage amount just because your current lender did. Having said that, you shouldn’t experience any affordability issues if you have been making your mortgage payments and haven’t taken out any other loans. In contrast, if your income has significantly decreased since you started your mortgage, you can encounter issues.
If your income has decreased since you started making mortgage payments, seek advice. Next, we’ll determine which lenders are most likely to approve your loan and the maximum amount you can borrow.
Why are loan-to-value and equity so crucial for remortgaging?
If you remortgage early, the amount of equity you have in your home might have a significant impact. Remortgaging can be challenging if you don’t have much equity. It is impossible to refinance if you have no equity or negative equity.
If you have a lot of equity in your house, a refinancing shouldn’t be difficult. This is particularly true if the rest of your application is complete and well-written. You could even be able to release some equity to put towards home upgrades or the purchase of a new home.
I want to figure out how much equity I have.
Simply deduct your mortgage balance from the value of your house to determine your equity. Your equity will be equal to the amount that is left over.
You might be able to lower your loan to value (LTV) if the value of your property has grown. As the best rates are linked to mortgages with lower loan-to-value ratios, this enables access to better bargains. For instance, it’s likely that you’ll be given the best rates if you refinance at 60% LTV. The rates won’t be as appealing, though, if you want to refinance at a higher LTV, such as 80–90%.