With inflation still high after a 41-year peak in October 2022, and the bank base rate at its highest since the financial crisis of 2007-2008 pushing up mortgage rates, many homeowners are struggling with higher monthly mortgage payments. 

With so many factors still at play, when is it worth exiting a fixed-rate agreement early? Frank Wampamba explains

The latest figures from the Bank of England are concerning – and it’s clear to see why. It predicts that by the end of this year, the majority of 4 million homeowners expected to enter into new contracts as their fixed-term mortgages end will be paying an extra £220 a month. Worse still, it forecasts this figure will rise to £500 extra per month by 2026.

With the recent sharp rise in the cost of living, this is likely to leave many homeowners concerned about their future finances. So, what are your options to minimise your mortgage costs?

Can I leave my high-fixed rate mortgage early?

Many homeowners entered into higher fixed mortgage rates before inflation reached its peak last year. Their reasoning here is understandable; with the prospect of rising mortgage interest rates, why wouldn’t they seek to fix their mortgage payments before interest rates rise further?

However, with inflation now slowly easing and the prospect of the Bank of England looking to bring this down to target, it is anticipated that the base rate will remain above 5% until the summer of 2024 before starting to fall over the following years, which may lead to some borrowers regretting their decisions to enter into long term fixed mortgage rates. Should you as a result consider exiting your fixed-rate mortgage agreement early, please consider this carefully. 

Only if the saving to be gained from your current rate to a lower rate is sizeable is this worth pursuing. Remember, you’ll have to pay an early termination fee – so this is likely to offset any savings you may be relying on. 

With the Bank of England base rate currently at 5.25% and anticipated to remain so for the foreseeable future, there may not be many favourable lending rates out there translating into significant savings to justify earlier exit of a present mortgage deal. Ideally, you should wait until the BoE rate drops to between 3% – 3.50% or lower, after which point you are likely to see much steeper savings. However, this might take some time to achieve. 

What do I do if my mortgage renewal date is approaching?

If you’re having to make a decision about your next mortgage rate agreement, my advice would be to seek out a shorter term fixed rate deal of 2-3 years, over which time it is anticipated (not guaranteed) that inflation will be moderated enough to give the BoE enough flexibility to start reducing its base rate. Then we will start to see lenders bringing down their lending rates, including positioning some competitive long term fixed interest rate deals. 

However ,it is important to point out that 2-3 year fixed mortgage rates are currently higher than longer-term fixes, meaning that your mortgage payments during these periods could cost you more than if you signed up for a 5-year fixed-rate mortgage. My advice in this situation is to do your figures, or better still, sit down with a mortgage adviser to review and discuss all the options available to reach the most relevant one for your circumstances.

While it may be tempting to run with a variable rate in the hope that the BoE rate rises have peaked and the only way for interest rates from here will be downwards, be cautious; this could leave you open to higher mortgage payments should unforeseen market conditions or inflationary pressures persist and create a need to raise rates or maintain them at the current level for longer.

In times of such interest rate uncertainty, with everyone looking for the optimum interest rate solution for their mortgages, it can be extremely difficult to determine the best interest option on your own. One type of interest rate doesn’t work best for everyone, therefore, taking mortgage advice that considers all of your personal and financial circumstances to determine the optimal solution for your circumstances is critical. 

Get in touch with our specialist team today to discuss the most practical and pragmatic solutions for you.