Incurring large Early Repayment Charge

[Justcallmebabs]

I am getting concerned about the interest rates. Currently on a fixed rate until Sept 2024 and god knows what they will be then but general consensus is that the good days are over and we might be looking at 5% average. This will increase our monthly payments by £1000 which is scary. I am considering fixing for 10 years now at about 2.6% but this will mean we pay a significant ERC - about £15k I reckon.

does it seem mad to do this?? Just looking for certainty whilst we have small children

It's a worry definately

I'd go to an independent broker and get some advice as to what's best for you as everyone's circumstances are different

Over £1000 a month is a scary thought tho isn't it?

Spoke with my broker and he was initially saying ‘I wouldn’t’ but when we did some figures he could see my point.

I just think so many people are going to possibly lose their homes. Frightening

@Justcallmebabs , I am in the process of doing this now. My current rate is 1.96 but expires in 2024. I have decided to fix for 10 years at 2.3. I also have an early repayment penalty but mine is £3700 so an easier decision to make, although still a lot of money. I couldn't deal with my mortgage going up £1000 a month. It is a difficult decision to make though.

You’ve worked out what the ERC would be. To work out whether it’s a good financial decision you need to work out what interest rates would need to rise to for you to save money. So the difference between your current interest rate and what you think interest rates might rise to, and the interest rate you could achieve by fixing now. That is a massive ERC as they are usually a single figure percentage so I think it’s unlikely to be worthwhile but I guess that means you have a very large mortgage? Do you have the cash available to pay the ERC or would you need to add it to the new mortgage?

Yep, mortgage is £530k. It’s the bit about ‘thinking what interest rates could rise to’ which has me stumped -who can predict? But with inflation and the fact the rates we have had have been historically low, offers of 5% seems reasonable in 2years? And if we fix at 5% in 2 years we will have paid the same amount as ERC in 15 months.

Just thinking we would have 10years of being locked into a certain monthly payment whilst kids in nursery

Yes it’s impossible to predict but given Catherine Mann‘s speech today I think we can expect a 0.5 bps increase next time and increases to continue in that direction for some time!

I think you are being very sensible.
I think lots of people are going to get stung in the next 12-18 months as their fixed term runs out. Especially if they are on DD for energy and suddenly realise they've been racking up bills.
I've read some stuff that suggests it might stabilise at 2-3% but others with dire warnings of 5%.
If certainty would make you sleep well at night then that has to be an important consideration

There are 'is it worth paying an ERC' calculators online. Have a play with some of those (first check exactly what your ERC is, don't just 'reckon').

With such a large mortgage, you won't need much increase in interest charges from 2024 to make it worth fixing now, as you've said £15k is 15 months at £1000. Or even if interest rates go up to 3 or 4% for most of the next few years, you could well be better off fixing at today's prices.

What I'm worried about is that they'll increase interest rates, but it won't do much about inflation, because the things that have gone up, food, fuel and utilities, people can't really stop buying, or cut down on much if they need to drive to work for example, plus pay won't increase to match, because the government is refusing to increase pay in the public sector, and private sector businesses won't either due to their own increased costs.

So more people will be spending most/all of their money on essentials and have nothing left for leisure spending, so there will be a big knock on effect on demand for anything non essential. So people in those industries will suffer.

But also consider ERC in the new mortgage. 10 years is a long time to be tied in if your circumstances change and you need to move. I was reading about a 10 year fix that only had ERC for the first five years, but I can't remember which provider that was.

Martin Lewis's site calculates whether it's worth switching.
I looked at it for us. It wasn't worth us doing it unless we could find a fix for less than 1.4%. We have 6 years left on our fix so the ERC is huge, wiping out any saving on monthly payments.

My mortgage is smaller than yours. I’m on a fixed rate until July 2024. If mortgage rates go up to 5% then my payments will go from £800 to £1050 so it is not worth me fixing and paying an ERC. My plan is once we qualify for 30 hours funded then we can start to overpay the mortgage.

I would definitely like fix now for 10 years, people thought I was crazy doing it at the beginning of the year, someone actually asked what would happen if I divorced.
We also got a lower rate than currently on so plan to over pay to that amount to clear our mortgage faster if possible.

If interest rates do rise to 5%, I don't think it will last 10 years.

I wouldn't do it.

If you can afford 15k ERC, then look at what the sums would do if instead of paying tge charge, put that as over payment on the mortgage instead.

It's not about 'being able to afford a £15k ERC' as they don't actually have to hand over that money, it's just taken care of as part of a remortgage.

It's whether it's likely to be cheaper to add that amount to the mortgage, to secure a fixed interest rate for the next 10 years.

In the OPs circumstances, it is something I'd be seriously tempted to go for and that's saying something seeing as we've never fixed and have been better off for all but about 6 months of over 25 years of having a mortgage.

At what interest rate does your mortgage become unaffordable?

We have worked out that our mortgage at 7/8% is pretty much unplayable for us with the cost of everything else going up too. We have fixed for 10 years and plan to heavily overpay to try to clear as much as possible in that time.

I think if around 5-7% is going to push you into lose your house territory then it makes the ERC more worth it. 15k is a lot of money, but losing your home is devastating.
On the other hand if you can afford 5% and maybe even slightly higher interest rates, then it's a more difficult decision.

Would you consider changing banks?

they might pay your breakage fee and still have a good 10yr rate.

good luck

It might seem cheeky for someone to ask what about if you divorce but the likelihood of you having to sell within the fixed rate period is a relevant consideration

Some really good points.

Unfortunately our broker has come back and said actually to fix for 10 years would be about 3.3%. What we have asked is for him to apply for the offer and we can delay 6-8 months before accepting the offer for a cost of £250. Plus ERC will be lower. It might be clear by then about what would be best to do (or might be even harder to call)

Have you looked at Lloyd's? I think their 10 year rate could be cheaper, but obviously depends on LTV and credit history etc.

@Justcallmebabs, a point to bear in mind is that brokers don't have access to all the best deals. I found my Lloyds 2.3% mortgage on their website. When I rang London and Country they couldn't beat it by a long way and didn't have access to the Lloyds mortgage. Always worth doing your research and checking every bank in addition to brokers.

@Justcallmebabs , sorry should add that it also depends on your LTV. In the small print, most of the good 10 year fixes I found had a 60% LTV and the mortgage calculators won't show these if you don't meet the criteria.

@Catatemyhomework
Had a look and you were right about Lloyds. 2.7% for 10 years. Going to have a chat with them tomorrow. Thank you v much!

We’ve just done a very similar thing and touch wood have locked in at 2.29% for the next 10 years. It’s a gamble and I don’t like the prospect of paying a large ERC but it felt worth it for the certainty. We spent a lot of time playing with spreadsheets. We might be wrong but I was prepared to pay for certainty.

We’ve spoken to a mortgage advisor today. I think we are going for a 5 year fix at 2.74%. We have an ERC of £3.6k, but to us it’s worth adding this to the mortgage knowing we have will have the security of it not rising.
We plan to continue overpaying as much as possible. Hopefully in 5 years interest rates won’t be as high.