Due to the increase in interest rates in recent months we are being asked regularly if now would be a right time to switch their mortgage rate, even while inside a fixed rate.
While rates have increased recently, overall they are still relatively low with clients considering switching rates now if they still have a year or two left on a fixed rate deal – the thinking being to lock in a lower rate now, rather than waiting for that fixed rate to end and potentially renewing on a higher rate at that point. We look at the main pro’s and con’s of switching while inside your fixed rate –
Pro’s
- Lock in a product on a longer term fixed rate gives greater stability to know what you are paying on a monthly basis and giving you extra piece of mind.
- Rates are still reasonably low.
- Rates likely to increase by the end of the year.
Con’s
- An early repayment charge would be payable to come out of a fixed rate period (check your current mortgage illustration/offer to know that figure)
- Potentially the new mortgage will be on a higher rate to what you are currently on.
- While rates are projected to increase there is no guarantee of this.
- Even if rates were to rise there is also no guarantee you would be better off financially switching your rate before the fixed rate completes.
Are you with an adverse credit lender currently?
For many different reasons you may be with what we call a sub-prime mortgage lender which typically means that you are on a higher interest rate which is usually down to previous credit issues.
At the time of your initial mortgage application you may have been limited to which lenders you were able to apply to and often in those situations for one reason or another you were required to tie in for say a 5 year fixed rate with them.
Recent Client Example – Case Study
We have recently dealt with a client who was in a similar such situation 3 years ago. At the time they were limited to lenders and were required to use a lender with a higher interest rate to accept on credit. Due to the clients income they needed to go particularly close to the maximum loan amount and due to this the lender would only look to lend the amount on a 5 year fixed rate product – it was not affordable on a 2 year fixed rate.
3 years on the previous credit issues are over 6 years old, meaning we were able to submit the new remortgage application to the best rate, mainstream mortgage provider. The client was also able to raise around £5,000 to cover the early repayment charge and to fund some minor home improvements.
By switching the rate and raising the additional funds the client is now saving over £200 per month by switching mortgage products now instead of waiting for 2 more years.
*** Moving your mortgage while in a fixed rate is not suitable for everyone. The example provided is for illustration purposes only. This article is also not to be taken as advice – we recommend you take mortgage advice from your mortgage adviser. ***
