HOMEOWNERS face soaring mortgage bills if interest rates hit 6%, but a calculator can help you work out if fixing early will save you cash.
Households face paying as much as £7,500 more a year on their home loan as the cost of borrowing is expected to jump.
The Pound fell sharply in value after last week’s mini-Budget, which included £45billion of tax cuts to be paid for by additional borrowing.
The Bank of England yesterday gave a very strong signal it would raise interest rates to try to prevent the weaker Pound fuelling higher inflation.
It could mean interest rates could hit 6% next year – and it could add thousands onto your home loan.
Anyone in a fixed deal won't pay more now, but will do when their deal comes to an end as rates are already higher.
Read more in Money
Martin Lewis explains what mortgage owners need to do after interest rate chaos
Mortgage payment calculator: How much can you borrow?
Around 1.8million fixed deals are set to end in 2023, according to UK Finance.
It means borrowers are rushing to lock in fixed deals as early as possible.
But you could be hit with charges worth thousands of pounds if you leave your deal before it ends.
Lenders charge up to 5% on the remaining balance to end a deal – this is called an early repayment charge.
Most read in Money
House prices 'could fall by 15%' as rates crisis drives up mortgage costs
Toys R Us website FINALLY returns to UK just weeks before Christmas
Wetherspoons to sell 32 pubs as it faces £30m losses – is your local for sale?
Families' mortgages set to soar by £1000s as interest rates head towards 6%
Homeowners are therefore facing a dilemma whether to wait until their deal comes to an end, when rates could have gone up again, or leave now and lock in current rates – but pay a charge.
Working out the most cost-effective solution can be tricky to figure out by yourself – but there are tools that can help do the sums for you.
A new calculator could help you work out whether to stick or switch early.
The tool from Nous, which is free to use, can help you work out the saving – or extra cost.
It takes into account how much you have left on your mortgage, the term remaining on the fixed deal, monthly repayments and the exit charge.
The tool predicts if you will save money even if you pay an early repayment charge, because you'll be avoiding higher interest rates in the future.
Its calculations are based on current estimates that the typical mortgage rate will hit 6%.
It also works out if you'll be better or worse off in different scenarios where interest rates are higher or lower than this.
For example, it also calculates if you'll save or lose out if rates rise to 7.75% or 9.5%.
You'll need details to hand to use the tool, including the remaining balance on your mortgage, current fixed rate, and the early repayment charge.
Here's an example of how the tool works if you had £250,000 left to pay on your mortgage.
If your fixed term mortgage deal at a fixed rate of 2% ends in April and the early repayment charge is at 2%, the tool says you'll be £1,640 better off if you remortgage now.
That's compared to if you stick to your deal – which includes the early repayment charge hit.
One homeowner used the tool and decided to take the gamble to switch now, paying a £12,400 early repayment charge.
The tool helped Lydia Joseph figure out she would save £9,480 switching now if rates rise to 6%.
How do I figure out how to switch myself?
It's worth pointing out that tools like this are highly speculative – and there are ways of figuring out the sums yourself.
First borrowers need to know exactly what their lender will charge them to exit early.
The bank should be able to provide a redemption statement in this case, which details information about your loan, including a breakdown of any early repayment charges.
Then customers should shop around for deals by using a mortgage comparison site such as Compare The Market or Uswitch, or speak to a broker.
Look for a whole-of-market broker, as some only recommend loans from a selection of lenders, not all of them.
When you have found the best deal currently available, do a few sums.
You will need to factor in the fee for arranging your mortgage too.
Look at what your monthly payments would be on this deal if rates are at 6% — which is the amount experts think rates could rise by.
If you would still be paying less, factoring in the early repayment charge and other fees, then it’s worth looking into switching.
What are the risks?
It's worth noting that no one can be 100% certain what will happen with interest rates.
It's a big gamble to stump up cash to pay an early repayment charge – as it is not impossible that they could fall.
For instance before Covid, the BoE was expected to continue increasing interest rates slowly, but it dropped to a record low of 0.1% in April 2020 when the pandemic hit.
That means there is no guarantee that you will save on your mortgage if the tool says you'll be better off switching early and paying an exit fee.
Experts warn you need to consider the charges carefully before going ahead with any early re-mortgaging deal.
It's only worth doing if the amount you save in interest on a new mortgage deal is greater than that charge.
Read More on The Sun
I’m a single mum on Universal Credit – I never shop without five checks
Horror moment woman, 26, is hit by rollercoaster and dragged 30ft
It's best to get a good mortgage broker to help you weigh up what to do.
Nick Morrey, of mortgage broker Coreco, told The Sun previously: “The problem is the cost of fixing now is definite, but the savings are probable and not guaranteed.”
Source: Read Full Article
