Remortgaging: Why paying fees might be a good idea

This is one that might be quite specific to people in a certain situation. If you have taken on a fixed rate mortgage with a loan to value (LTV) ratio (this is the ratio of the amount you borrow versus the value of the property) of between 95% and 75%, then this might be for you.

When we bought our house four or so years ago, we weren’t really planning to buy a house so soon. As it happens we were living in the house as a rental, the landlady approached us to make a quick sale so she could raise some capital, and we were able to pick it up at lower than market value. We scrounged together whatever we could find in the form of a deposit and managed to secure a 95% repayment type mortgage. Our repayments were around £830 a month.

With the bank of England base rate at an all time low, and the prospect of a rate rise being terrifying in light of our already massive repayments, we decided to fix at the rate of 4% for 5 years with the Chelsea Building Society. Our experience with the Chelsea has actually been really good considering.

For those who don’t know, these types of fixed rate mortgages tend to come with early repayment charges that drop over time. These can be massive. Ours was 5% at its height which was pushing 5 figures. Ouch.

However, when we learned that we were expecting our second child and we were about to enter the last year of our fix, I started to think about what we might save when we remortgaged around the time the deal ended.

The nice thing about a repayment type mortgage is that you build up equity (value in your house that you own) which in turn reduces your LTV over time, especially if your house increases in value too. Mortgage providers also determine what rate you might get based on your LTV, and if you pass a “threshold” value of LTV then you get a massive rate discount. For instance, rates often drop at 90% and 80% LTV.

I did my research and discovered I could drop my rate to almost 2% when I switched as our LTV was now 75%! This was great news.

At first I dismissed this and then decided to wait until the deal ran out to switch. Then the question popped into my head, “is there money to be saved here?”. I started investigating what the early repayment fees entailed. In the last year of the deal these were about £1600. Sounds a lot. I got turned off.

Then I did the math.

If I switched from an approx 4% to 2% rate, my repayment would drop from approx £830 to £630. Thats £200 a month saving, and £2400 in a year!

I had plenty in my savings/investment bucket to more than cover the £1600 early repayment charge comfortably, and I would make that back and some over the course of a year! So here we are enjoying cheaper monthly repayments, and I’ll use the difference to top my savings back up over the next 12 months, and some!

The lesson here is to not just go with it because you are on a fix or a deal. Mortgages are huge beasts, and so little changes can affect them in a big way, especially if you are passing through one of those LTV thresholds. Investigate the deal you have, what charges it carries, and what it might save. Sometimes you are better breaking the deal!

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