Matthews IFA Ltd
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Ditch the Fixed and save £1000!

Some of the lowest mortgage rates on record mean homeowners can break out of existing fixed-rate deals and be nearly £1,000 better off.

Despite hefty penalties to cash in a current deal, thousands of borrowers who are midway through a five-year fixed could switch to a much cheaper short-term rate and still save hundreds of pounds over the next two years.

Whether you hit this switching jackpot will depend on the gap between your current rate and new offer, the amount of equity in your home, the amount of mortgage outstanding, the size of the exit penalty and any new fees to pay.

Thousands of borrowers who took out a five-year fixed in 2012 will today be halfway through their mortgage term. Many were taken out amid huge uncertainty about how long the Bank of England base rate could stay at 0.5 per cent.

There was also massive demand to fix for five years as home-loan rates finally fell after years of tumult following the credit crisis.

Usually, it is rarely a good idea to remortgage before a fixed rate deal ends because lenders impose hefty early repayment charges, sometimes up to 5 per cent of your total outstanding mortgage. But mortgage rates are now so cheap that, despite having to fork out a penalty, many borrowers may still end up better off by abandoning their current deal early.

The average five-year fixed rate for a borrower with a 25 per cent deposit was 4.29 per cent in April 2012, according to the Bank of England. Today there are some five-year rates available at under 2.5 per cent, two-year deals at under 1.5 per cent and ten-year fixes for under 3 per cent.

Figures from mortgage broker London & Country show that in February 2012 Britain’s biggest lender, Halifax, offered borrowers with a 40 per cent deposit a five-year deal at 4.69 per cent. On a typical £150,000 repayment home loan, this worked out at £850 a month.

But switch now to Woolwich’s two-year fixed at 1.79 per cent, and your monthly repayments would be just £641 - £209 a month less.

There is no fee for the new deal and you get a free valuation and legal work.

Halifax charges a 3 per cent fee to exit the deal early - so a whopping £4,195. But even after this is taken into account, borrowers would still save c. £818 - essentially getting more than a month’s mortgage payment for free.

With the average five-year fixed at just under 5 per cent in 2012, many borrowers on more expensive deals can save as much as £1,000.

Remortgaging early won’t work for everyone, but with the way rates have plummeted recently it means there could be good opportunities to save despite early repayment charges.

The key is not to look just at how much you can cut your monthly repayment by, but at how much you will save over the whole deal. The longer you have been tied into a higher rate with your current deal, the more likely it is to make sense to move.

The fee can either be paid upfront or added to the remortgage loan. If you add the fee to your mortgage, you will pay interest on it.

However, before you do anything you must read the small print of your lender’s mortgage deal to find out exactly what the penalty is for leaving early.

Some lenders charge a flat fee that is the same regardless of when you exit your deal. If your bank has a flat 5 per cent charge it probably won’t be worth remortgaging early.

However, many lenders reduce the penalty the longer the deal goes on. So, in the first year of your fixed, you may be charged 5 per cent if you leave. But this can drop to 3 per cent in year three and even as low as 1 per cent in the final year.

So it pays to note exactly when you signed up for your mortgage, as waiting an extra month before remortgaging and seeing the exit rate drop by a whole percentage point could save you a tidy sum.

Thousands of borrowers are continuing to pick five-year deals over two-year fixes. This is because, for often little more than £50 to £100 a month more depending on the loan size, they benefit from protection against bill hikes for longer. Some borrowers therefore may be tempted to pay a little extra and lock in for another five years.

This, however, is a gamble because there is no way of knowing what rates will be doing in two years’ time when your original fixed deal was due to end. If they had fallen even further, you could kick yourself at missing out on bigger savings.

The Bank of England base rate is not expected to rise until next spring at the earliest. This means that mortgage rates could stay low for a while yet, and there is even talk of them inching lower still.

On the flip side, the best deals could be axed quickly, so borrowers shouldn’t wait too long before making a decision.

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