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Ed & Jo – worth paying the Early Repayment Charge

Ed and Jo took out a two year 6.75% fixed rate in summer 2008 from a large high street lender, thinking that, since Bank Base Rate (BBR) had come down from 5.75% in July 2007 to 5% in June 2008, it was unlikely to come down much more. In any case, they prefer fixed rates as they like the security of knowing what their repayments are over set periods of time. Then the BBR started falling, and didn’t stop until it hit 0.5% in March 2009. With two year fixed rates now around 3.5%, Ed and Jo are wondering if it is worth switching their £600,000 interest only mortgage away from their current lender.

With current monthly repayments of £3,375 (6.75% x £600,000) and an Early Repayment Charge (ERC) of 3 months’ interest, switching will cost them £10,125 in ERC, plus about £5,000 in legal, valuation and arrangement fees, a total of approximately £15,000 to switch. But, on a 3.5% rate, assuming they complete their remortgage by June 2009, they will save £21,000 in interest charges over the course of the next year, compared with the rate they were on [(6.75% – 3.5%) x £600,000.]

So the net saving from remortgaging is around £6,000 across the year. And in these difficult times, the fact that their new mortgage payments will come down from £3,375 to £1,779 will help make their cash flows a lot more comfortable.

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