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Today's big question, which many of you are asking, is, should I wait until my current deal is about to expire to get a new fixed rate, or should I bite the bullet, pay the early repayment charges, higher monthly payments and move to a new fixed rate now?
This is a difficult question because, with the ongoing financial market challenges, we cannot even begin to try and predict where fixed-rate pricing will be in the coming days, let alone months.
If you are on a fixed rate which expires in the next 6 months, then depending on your current lender's rules, you may find that you can switch to a new fixed rate with your existing lender right now without incurring any penalties, and your new rate will start once your current rate ends.
If, though, your current fixed rate deal has even longer left to run, and you want to move to a new fixed rate right now with either your current lender or new lender, then you will most likely incur an early repayment charge.
So, is it worth paying the early repayment charge now to lock into a new fixed rate? The only reason you would do this would be in the hope that the fixed rate you get now is lower than what might be available when your current rate expires; and low enough to justify the added costs. Based on economists' predictions, there is a good chance this will be the case. However, that's not the complete picture because not only do you have to factor in the costs of an early repayment charge, but you also need to consider that the fixed rate you move to now is likely to be substantially higher than your current deal.
Let's put an example together to illustrate:
I borrowed £150,000 in June 2021 and took a fixed rate for 2 years at 1.78%, which means my rate expires at the end of June 2023. I am looking at the market now and thinking that fixed rates in June 2023 are likely to be higher than they are today, so should I change now? If I do, under my lender's terms, I will need to pay a 1% penalty on what I currently owe, which, for this example, we will say is £1400. I want to move to a fixed rate deal, and I have been quoted 4.10%. If I change the deal now, this means that rather than paying my mortgage at 1.78% until June 2023, I will be paying it at 4.10% and so my payments will go up much earlier than they should be, and I will need to pay a £1400 early repayment charge. All in an attempt to get a rate now, hopefully, lower than it will be in June 2023 and low enough to justify the extra costs.
Effectively, changing to a new fixed rate now means that my mortgage costs will be considerably higher between now and June 2023 compared to doing nothing. Not taking action, though, risks being on an even higher fixed rate in June 2023 than I could get today, and although likely, there is no guarantee that this will be the case.
The only way to answer this categorically is if we know what the fixed rates in June 2023 will be, and we can then work out the maths to see if it's worth moving now or not. But unfortunately, we don't know where fixed rates will be in June 2023, and we would be foolish even to make reasonable estimates.
It all comes down to what's most important to you. Are you prepared to move to a higher fixed rate today and incur the additional costs for doing so for the peace of mind that your new rate today is hopefully lower than when your current deal expires? If the answer is yes, then a rate transfer with your existing lender or a re-mortgage to a new lender is the way forward. If the answer is no, stay put until 3 to 6 months before the expiry of your current deal.
It is a difficult conundrum, and whilst we can't advise you on this one way or another (because we don't have a crystal ball), we can show you the financial impact of moving to a new fixed rate ahead of time, which will help you make an informed decision.
Get in touch with one of our independent brokers today to see how we can help you at this challenging time.