Households could save thousands by remortgaging now and paying an early repayment charge.
The rate at which interest rates are rising means that waiting until the end of a fixed term to remortgage may not be the best financial decision. Instead, locking in a lower rate now, and paying a proportion of the loan to leave a fixed deal, may save homeowners thousands in the long run.
The Bank of England’s base rate is expected to reach 3pc to 3.25pc next year in a bid to tackle soaring inflation, according to the Centre for Economics and Business Research, a think tank.
A mortgage borrower with a loan worth 75pc of a £400,000 home could save £1,293 over the next two years if they ended their two-year fixed deal now and paid an early repayment charge, according to analysis for The Telegraph by estate agent Hamptons.
The savings are based on interest rates rising by 1.25 percentage points next year, bringing the Bank Rate to 3pc – at the lower end of the CEBR forecast. The average two-year fixed deal is currently at 3.64pc but would rise to 4.89pc if that happens. The homeowner’s monthly repayments would be £1,524 if they fixed again today at 3.64pc, compared with £1,735 if they wait until the Bank Rate reaches 3pc and deals become even more expensive.
The scenario assumes a fixed early repayment charge of 1.25pc, which is offered by Nationwide, a major mortgage lender. Fixed repayment charges are more common on two-year fixed deals, according to Hamptons.
If interest rates rose by 1.5 percentage points – to 3.25pc, at the upper end of the CEBR forecast – the savings for these households would be £2,342 during their new two-year fixed deal, despite the early repayment charge.
Aneisha Beveridge, of Hamptons, said: “If a household is approaching the end of their mortgage next year and they think rates will be higher than they are today, then it might be worth exploring fixing now and paying an early repayment charge.”
However, she warned that if interest rates fall towards the end of 2023 then households due to remortgage at that time could be worse off by getting a new deal now. Hamptons has forecast interest rates to peak at the end of this year or early next year, potentially starting to fall again towards the end of 2023 to 2024.
Mark Harris, of mortgage broker SPF Private Clients, said: “We are seeing more people break out of fixes and remortgaging because they don’t want to wait 18 months when the current fix finishes to then get a real payment shock.”
But he cautioned homeowners to look at their individual circumstances. “Some people will be on rates close to 1pc, and if they’ve got a couple of years to run on those it might make sense to just stick with what you have,” he said.
Mr Harris added that some lenders will have different early repayment charges which borrowers would have to take into account if they wanted to break out of the deal. Many, particularly on five-year deals, have early repayment charges that start out very high and taper off towards the end of the deal.
“Had you made this decision three months ago, it was probably the right thing to do, but are rates going to continue to go up?” he said. “No one has a crystal ball. Only hindsight will tell you if it’s the right thing to do or not but if it’s worrying you and keeping you awake at night, then it’s something to explore – but very carefully.”