Borrowers rush to pay exit fees and lock into new mortgages as interest rates climb
The number of borrowers paying Early Repayment Charges (ERC) has soared following fears of rising interest rates.
Yorkshire Building Society has seen an 88 per cent increase in the value of ERCs paid so far this year, compared to the same period in 2020.
It’s a trend that brokers have also witnessed.
Dean Esnard, director at Magni Finance, has had more clients paying to leave fixed rates – in some cases swallowing penalties of more than £6,000.
It comes as the Bank of England has raised the base rate five times over the last six months, prompting a rapid increase in mortgage costs.
Esnard said: “People are worried about rates going up. Paying an exit fee is hedging that rates are going to be a lot higher when their current deal ends.”
Rhys Schofield, managing director at Peak Mortgages and Protection, added: “A scenario that was a once in a blue moon is now coming up multiple times a week. Clients are seeing all their other costs skyrocket and want some degree of certainty over their largest expense and who can blame them?”
Lenders are now expecting more borrowers to follow this pattern as the year goes on.
Ben Merritt, director of mortgages at Yorkshire Building Society, said: “It’s perhaps no surprise that in such a rising rate environment we’ve seen more borrowers consider their options before coming to the end of their mortgage deal.
“With rates seemingly only heading in one direction and forecasts for this trend to continue, I suspect we’ll continue to see similar activity throughout the rest of the year at least.”
Brokers are going through sums carefully to help clients decipher whether it makes sense to pay an ERC and fix to a higher rate.
Dominik Lipnicki, director at Your Mortgage Decisions Ltd, said it is a complicated issue.
He added: “It depends on three factors. Firstly, what do clients think that will happen with mortgage rates and what impact that could have on their payments. Second, the size of the early redemption charge itself and, third, how long it is due to be left in place.
“Many borrowers would not have experienced rising rates and to some that will be very stressful, it is the adviser’s job to ensure that their decision is as fully informed as possible.”
Esnard said it will usually only make any sense in the final year of the mortgage when ERCs are typically no more than one per cent.
He added: “We go through it, so clients understand the cost. Most people add the fee to the loan, so remortgage to borrow the extra, but they don’t feel like they’re paying it when it’s added to the debt, so we stress that point.”
Borrowers gambling on the end of low interest era
The main issue is that no one really knows whether rates will be significantly higher in a year, so it is a gamble for borrowers to pay more now in the hope of saving later.
Rates could rise significantly before falling back down.
Borrowers who have paid to leave will likely need a sustained period of high interest rates to make the exit worthwhile. Only time will tell if they made the right choice.
Lewis Shaw, founder at Shaw Financial Services, said: “In the main, to pay an ERC is probably a bad idea; you’ll likely be spending a penalty into the thousands and jumping onto a higher rate.
“Most people would be better off making overpayments up to the 10 per cent limit for most lenders.
“This reduces the balance and will have more impact as the rate is lower, so when it comes time to remortgage, the loan amount is reduced. Therefore, a smaller mortgage will mitigate any jump in the rate. Trying to predict where rates will be in 18 months is for the birds.”