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Switching to a Lower Fixed Rate

Posted on 13 June 2010 by Alison


Please could someone advise me as to how I will benefit from quitting my current fixed rate. I have used one of the avaliable calculator and it states that I will benefit changing if my new rate is below 4.66%.

My details are:

Current mortgage is 126922 24 years left on a rate of 5.79.

New mortgage would be 130800 (now includes a redemption fee of 3878) at a rate of 4.24 over 24 years.

My current fixed rate still has 3 years and 1 month left.

I have been trying to work out what I will save and am unsure of whether this is going to benefit me as the calculators suggest?

 Alison

There are many elements that you need to consider when calculating whether or not it is worth the move and none of the online calculators will cover all of these. However, the starting point for any calculation will always be what will it cost me to stay were I am?

In your instance, this will be (£126,922 x 5.79%)/12  x 37 (3 years 1 month)= £22,658.75

When looking at the costs of the new mortgage you need to take into account any fees you will have on redemption of the existing mortgage. These will include any early repayment charge (ERC), redemption fee and costs for sending the Title Deeds to the solicitors dealing with the remortgage. The ERC you already know, £3878 and typical repayment fees will be £195 + £40 = £235.

You will also need to look at the costs of taking a new mortgage. In addition to the product fee, you will have to include a valuation fee and legal fees, unless these are offered free as an incentive on the product chosen.

I note that the new fixed rate you are looking at runs for a shorter period than the existing one and so you will also need to know the interest rate the new mortgage product reverts to after the fixed rate period.

I have looked at two products with a starting rate of 4.24% for 2 years, one with low upfront costs and one without.

  Standard Costs  Low Costs

24 months interest at 4.24%  £11091.84  £11091.84

13 months interest at revert to rate  £ 6149.78  £  8062.73

Product Fee  £ 999.00  £  199.00

Approximate Valuation Fee  £ 325.00  £  nil

Approximate Legal Fees  £ 250.00  £  nil

Existing Mortgage Costs

Early Repayment Charge £ 3878.00  £  3878.00

Redemption Fees £  235.00 £  235.00

Total   £22,928.62  £ 23,466.57

As you can see there is a big difference between the two, which is caused by the revert to rate and when you add in the associated costs for each it is a very close call as to whether or not it is actually worthwhile?

I recommend that rather than relying on the online calculators, you seek advice from an independent mortgage broker who can locate the best deal available in your circumstances and then cost it out for you to see whether or not it is worthwhile moving.

Peter

Answers provided in response to Ask the experts are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.

We recommend you seek professional advice with regard to any of these topics where appropriate.


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