I am currently one year into a two-year fixed-rate mortgage on a rate of 2.7 per cent with the Coventry Building Society.
We have plenty of equity in our home, so when we remortgage it will be below 60 per cent LTV.
Our deal comes to an end in January 2019, but the ERC on repaying early drops to just 1 per cent in January next year.
Our mortgage balance is currently £200,000.
I’m wondering whether it would be worth it to remortgage early – in January 2018 – and pay this ERC in order to secure one of the much cheaper fixed rates there are at the moment?
I worry these deals won’t be around when our current deal comes to an end.
We’re also considering taking out a bit more equity from the property to do some improvements. This wouldn’t tip us over the 60 per cent LTV boundary.
If we want to do this, surely it would make sense to remortgage early and get a bigger loan on a lower rate?
Or should we get a second charge now and do the work before remortgaging in 2019?
I’m also not sure whether a two-year or three-year fixed rate would be better if we opt to remortgage sooner.
Andrew Montlake, of mortgage broker Coreco, replies: There are lots of possible combinations for you here and it is important to sit down and work through the calculations carefully.
With only one year left on your mortgage there is not much time to make up the difference on the penalties.
Looking through the figures it looks like you could potentially remortgage on to a two-year fixed at 1.14 per cent which, assuming you have say 20 years left on the mortgage, would save you around £145 per month – a total of £1,753 over that year.
Adding in arrangement fees of £900, this means you would, on a like-for-like basis, be approximately £1,100 down overall once the penalties are taken into account.
On a pure cash basis then, it seems better to stay as you are.
However, this does not take into account the full picture. Firstly, the unknown is what would rates be in the second year once you came to remortgage in 2019 and beyond.
Some of our clients have preferred to pay this additional cost for the security a longer-term fixed rate would give them just in case rates do indeed rise.
Also, we have to take into account the cost of potentially borrowing more funds on either a further advance through your lender or a second charge facility, which may all be at a higher rate than the remortgage product and offset part of this loss.
The whole interest rate picture is far from clear at the moment and despite the fact that the Bank of England have hinted at higher rates, the whole Brexit conundrum is really clouding the issue.
It may be a case that rates will only rise now so that they can be cut again if needed during a messy divorce from the European Union, but it is really all about your personal piece of mind.
I am a big fan of three or five-year fixed rates at these current levels, which give security at a time when rates really are at competitive levels.
You can obtain a good five-year fix at just 1.59 per cent at the moment, considerably less than you are paying now – which gives you the added benefit of four additional years at such a low level.
All of this therefore becomes a question of risk in the face of an uncertain future.
While pound for pound over the remaining 12 months you are down in cash terms, what price do you put on security in the future and obtaining the additional funds you need now at a low longer-term rate?