Getting out of a Fixed-rate

What happens when you come out of your fixed-rate mortgage?

The first thing we do is look at the exit costs. If we’re not coming out early, there are no early repayment charges and it’s not an issue. But if we are coming out early, there’s going to be a penalty. The second element is to consider is applicable fees if we’re changing lenders. 

At the moment, where the advice really is starting to change is around the product that we recommend to a client when they are initially considering another five-year fixed-rate. We typically ask more about why it is they want a new five-year fixed-rate, to uncover the reasons behind it. We discuss these reasons and a client’s circumstances to determine if that’s truly the right solution for their situation.

Should I look at a two year, five year or ten year fixed rate?

Right at this moment, if you look at two year fixed rates, they are more expensive by about 0.5% than a five year fixed rate.  Ten year fixed rates are typically about 1% cheaper than a two year deal. So there’s a sliding scale of rates depending upon the term. 

What that says to us is that the market is expecting rates to go down. We need to consider the lender’s costs associated with acquiring the funds they need to lend to borrowers and their considerations around market movements when designing a product. 

There’s a lot of contingency in that rate before it gets offered to marke as it’s designed to ensure a profit for the lender. At the moment, a typical ten year fixed rate might currently be, let’s say, 4%. But the chances are that’s going to be pretty expensive come the second half of that ten year period. 

Meanwhile five year fixed rates are at a current rate of around 5.5% or nearly 6%. Again that’s going to be potentially quite an expensive mortgage if rates start dropping in the second half of the five year period.

So what we’re saying to people is, yes, there’s a five year fixed rate, but that peace of mind you want is going to cost you. At the moment the price is quite significant. 

At the time of recording, a five year fixed rate option was 2.73% more expensive than a base rate tracker for one of our cliens, who was initially looking for a five year fixed product. After careful consideration, a tracker was recommended instead and we suspect that the client may stay on that tracker for the rest of the life of that mortgage.

What are my options when my fixed rate mortgage ends? 

The options are the same, regardless of whether you’re coming out of the fixed rate early or at the end of the term. Those options are really about what product to go for. You can refix for two, five or ten years, or you can go for a discounted or tracker product. (All available options will be discussed with each client, based on needs and circumstances).  

A discounted product gives you a discount from the lender’s standard variable rate. A tracker rate is the Bank of England base rate plus a margin, usually 1.5% or 2%. Or there’s the fixed rate approach. 

We’ve just gone through ten years of interest rates falling and then remaining very low. And the default approach was to pick a fixed rate and stay there. We’re now in an environment which, if you look at the last 20 or 30 years, is more normal in so far as fixed rates aren’t the default any more: they’re not the utopian solution that they’ve been for the last ten years. They are there to provide financial security and surety, and for that you’re going to pay a premium. Mortgage advice is tailored to the needs and circumstances of each client.

Is it worth getting a new mortgage deal right now?

It’s all down to your circumstances. A lot of clients we speak to at the moment who are perhaps four years into a five year fixed rate were First Time Buyers when they took out their mortgage. To them this is a new environment, that’s causing a lot of concern and vulnerability – especially with budgets being stretched by other factors in the economy. 

Kevin had a client last week who wanted to refix now, because he only has another £300 in his monthly budget to cover further rate rises. He was therefore concerned that in a year’s time this wouldn’t be enough and was therefore keen to switch at today’s rates and associated monthly mortgage cost. In a year’s time, arguably, a mortgage could sit outside his perceived budget. 

So it really depends on individual circumstances. Our brokers are very experienced and will walk you through what is a bit of a minefield at the moment. There’s a lot of hysteria in the media and panic in the consumer groups. But the point is, there is a route through this. And a good, experienced broker who you trust will look after you.

How can Mortgage Marketplace help me?

One of the first things we do is talk about budget availability. You might think your options are limited, but once we’ve assessed the budget we can look at your specific situation and find a solution for it. Sometimes the client is right to make a change, but more often it’s not quite as bad as they might think. 

There are also things that we can do with the mortgage recommendation to get it within budget. We will confirm the new monthly amount that you will need to pay. If that’s out of budget, then by extending the term of that mortgage by a year or two we can make it more affordable. 

One might argue that extending the term of the mortgage is lengthening the duration of debt and the overall interest you pay. But in reality, most of us won’t stay with our mortgage till the end of its term. 

If you have a 25 year mortgage today, you are very unlikely to be on the same mortgage with the same lender in 25 years time. You’ll have moved house, you’ll have remortgaged elsewhere… a lot can happen in that period of time. So extending a mortgage term can be a very reasonable way of getting something within budget. Seek advice from a qualified professional before making changes. 

These are some of the ways we can make a significant difference at quite a worrying time for people. So pick up the telephone and have a chat with us, because there are quite imaginative and dynamic solutions and advice out there and in most instances there is an answer that works for you. 

Kevin: “My final point is to think about the alternative to buying a home – which is renting one. You have far less control in that situation. So if you can get some proper, considered quality advice on your mortgage so that you feel confident about the future, the issues are not as worrisome as they might seem at first.”

You may have to pay an early repayment charge to your existing lender if you remortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.