Should I break out of my fixed rate mortgage?
With interest rates on the rise, a question we’re being asked a lot at the moment is “should I break out of my fixed rate mortgage?”
There are a number of reasons why you might consider breaking out of your current fixed rate mortgage early. Perhaps you’re worried that interest rates are going to continue rising, and want to fix something in sooner rather than later, or maybe you want to borrow additional funds to pay for home improvements, but your current lender won’t offer this and you’d rather not wait for the deal to expire. At the moment, most of the people asking us are worried about rising interest rates.
If you’re one of those worried about rising interest rates, I’m afraid the short answer is that it’s probably not possible to say for sure either way whether it’s worth breaking out of your current deal, because none of us know what’s going to happen with interest rates over the coming months and years.
Whatever your reason might be, it’s important to understand the process and weigh up the pros and cons. There are several factors to consider so here’s the long answer:
Early Repayment Charges
Generally speaking, if you’re tied into a fixed rate mortgage, you’ll have an early repayment charges (ERC) associated with the loan. ERCs will vary between lender and can sometimes be as high as 5% of the outstanding balance. Some lenders will charge the same ERC regardless of when you break out of it, while with others the ERC reduces the further into the fixed rate you are.
Depending on what your priorities are, you might feel that in some cases, paying the early repayment charge works for you – maybe if you need to raise additional funds.
Paying the ERC to remortgage onto a cheaper rate rarely works out to be an overall lower cost after factoring the ERC in unless there’s been a significant decrease in interest rates since you took the deal out and you’re in the final years of your fixed rate term.
Interest Rate Differential
The second thing to consider is how much more interest you’ll pay between now and when your old deal was due to finish.
If your mortgage is on a repayment basis, this can be quite a complicated calculation, because it’s not just the difference between your old monthly payment and the new one.
If you’re adding the ERC to the new mortgage you’ll also have to consider interest charged on top of this extra borrowing.
Future Interest Rates
Whilst the previous two points can be established as exact amounts, unfortunately the impact of future interest rates can’t be quantified because it’s impossible to say what path they will take.
What a skilled independent mortgage adviser can help you understand however, is what the ‘break even’ point would be in the future. We can work out where interest rates would need to be at the end of your current fixed rate period to make breaking out worthwhile, and this will help you decide whether you think it’s worth breaking out early.
Whilst it’s important to understand nobody will be able to give you certainty about whether breaking our of your current deal is going to be financially worthwhile, the peace of mind offered by securing your payments for the next 2-5 years could be something money can’t buy.
If this has got you thinking, or you’re within 6-9 months of your current deal ending, we’d love to hear from you. Get in touch and we’ll be help you understand what’s possible, or sign up to our monthly newsletter, to keep your finger on the pulse.
Sam Mason – 16th September 2022