HOMEOWNERS face skyrocketing mortgage bills if interest rates hit 6%, but a calculator can help you determine if early repair will save you money.
Households have to pay up to £7,500 more a year on their home loan as the cost of borrowing is set to rise.
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The pound fell sharply after last week’s mini budget, which included £45bn in tax cuts to be paid for by additional borrowing.
The Bank of England gave a very strong signal yesterday that it would raise interest rates in an attempt to prevent the weaker pound from fueling higher inflation.
That could mean interest rates could hit 6% next year — and that could add thousands of dollars to your home loan.
Anyone in a fixed agreement will not pay more now, but will when their agreement comes to an end because the rates are already higher.
Around 1.8 million fixed transactions are expected to complete in 2023, according to UK Finance.
This means borrowers are rushing to get fixed deals as soon as possible.
But you could be hit with fees worth thousands of pounds if you leave your deal before it ends.
Lenders charge up to 5% of the remaining balance to end a transaction – this is called a prepayment fee.
Landlords therefore face a dilemma: wait out their contract, when rates could have gone up, or leave now and lock in current rates – but pay a fee.
Finding the most cost-effective solution can be difficult on your own – but there are tools that can help you do the math for you.
A new calculator could help you figure out whether to stay or switch early.
The tool from Us, which is free, can help you calculate the savings – or additional costs.
It takes into account the amount you have left on your mortgage, the remaining term of the fixed agreement, monthly repayments and exit fees.
The tool predicts whether you will save money even if you pay a prepayment fee because you will avoid higher interest rates in the future.
His calculations are based on current estimates that the typical mortgage rate will hit 6%.
It also determines whether you will be better off or worse off in different scenarios where interest rates are higher or lower than that.
For example, it also calculates whether you will save or lose if rates go up to 7.75% or 9.5%.
You’ll need details to hand to use the tool, including the remaining balance on your mortgage, current fixed rate and prepayment charges.
Here’s an example of how the tool would work if you had £250,000 left on your mortgage.
If your fixed term mortgage at a fixed rate of 2% ends in April and the prepayment charge is 2%, the tool says you will earn £1,640 if you pay off now.
This is relative to if you stick to your deal – which includes prepayment charges.
One owner used the tool and decided to take the gamble of switching now, paying a prepayment charge of £12,400.
The tool helped Lydia Joseph realize she would save £9,480 by switching now if rates rose to 6%.
How can I figure out how to change myself?
It’s worth pointing out that tools like this are highly speculative – and there are ways to calculate the sums yourself.
First-time borrowers need to know exactly what their lender will charge them to get out early.
The bank should be able to provide a repayment statement in this case, which details information about your loan, including a breakdown of prepayment charges.
Next, customers should research deals using a mortgage comparison site such as Compare The Market or Uswitch, or speak to a broker.
Look for a broker that covers the entire market, as some only recommend loans from a selection of lenders, not all.
When you’ve found the best deal currently available, do some math.
You will also need to factor in the cost of arranging your mortgage.
Look at what your monthly payments would be on this deal if rates were at 6% – which is the amount experts believe rates could rise by.
If you’re still paying less, factoring in prepayment charges and other fees, it’s worth considering switching.
What are the risks ?
It should be noted that no one can be 100% certain what will happen with interest rates.
It’s a big gamble to find the money to pay prepayment charges – because it’s not impossible for them to drop.
For example, before Covid, the BoE was supposed to keep raising interest rates slowly, but it fell to a record low of 0.1% in April 2020 when the pandemic hit.
That means there’s no guarantee you’ll save on your mortgage if the tool says you better switch early and pay an exit fee.
Experts warn that you should carefully consider the fees before proceeding with an early remortgage deal.
It’s only worth doing this if the amount you’ll save in interest on a new mortgage deal is more than those costs.
It’s best to have a good mortgage broker to help you weigh what to do.
Nick Morrey, of mortgage broker Coreco, told The Sun previously: “The problem is that the cost of repair is now certain, but the savings are probable and not guaranteed.”