Lenders impose penalties for repaying a fixed rate mortgage early. So what happens if you need to move in the middle of your fixed rate period? Luckily, there are ways to move home while keeping your fixed rate mortgage in place – you just need to know what to do.
In this article, we’ll explain everything you need to know about moving with a fixed rate mortgage, including how to limit the effects of any fees and why speaking to a broker is always the best idea.
What is a fixed rate mortgage?
A fixed rate mortgage is when the interest rate payable on a loan stays the same for an agreed period of time, regardless of any changes in the Bank of England base rate. The main advantage of this type of mortgage is that it gives borrowers peace of mind and protection against rising interest rates. However, one drawback may be that if interest rates fall during the fixed rate period, borrowers are stuck on their higher rate until it expires.
When the fixed rate period comes to an end, the mortgage will usually revert to the lender’s standard variable rate (SVR). This is often much higher than the rates available from other lenders at that time. It can be worth considering remortgaging to a new deal before this happens.
Fixed rates are available for differing lengths of time, from two to five years being the most common. Some deals have an even longer fixed rate period, but these will usually come with higher interest rates to begin with.
What are early repayment charges?
Mortgage early repayment charges (ERC) are fees charged by the lender if you want to repay your mortgage earlier than agreed. They are also known as redemption penalties or early exit fees. ERCs were introduced in the UK in the 1980s and were designed to recoup some of the interest payments that lenders would lose if customers repaid their mortgage early.
The penalty period relates to the interest rate product that you have, rather than the mortgage repayment term. For example, a two year fixed rate would normally have ERCs during the two year term that applies to the fixed interest rate.
Today, ERCs can vary widely depending on the mortgage deal you have, and can be anything from a few hundred pounds to several thousand. It’s important to remember that if you do want to repay your mortgage early, you will need to factor in any Early Repayment Charges that apply. Whether or not it’s worth doing so will depend on your personal circumstances.
The amount of the charge will depend on your mortgage lender and how long ago you took out the mortgage. It could be a fixed amount, such as 2% of your outstanding loan, or it might be a percentage of the amount you’ve repaid so far. For example, if you’re two years into a five-year deal and still owe £100,000, an ERC of 3% would cost you £3,000.
You will find more useful information in our Guide to Early Repayment Charges.
Porting or paying an early repayment charge, which is best?
If you’re coming to the end of your fixed term or you have a variable rate mortgage, then there’s no penalty charge for repaying your old mortgage early. This means you can search for the best Moving Home Mortgage without worrying about paying exit fees.
However, if you have a few years left on your fixed term then there’s likely to be an Early Repayment Charge (ERC), which could be as much as 5% of your outstanding loan.
In this case, it might make more financial sense to take out a new mortgage with your current lender, incorporating the fixed rate you already have. Can I move my mortgage to another house? Not all lenders will allow this though, so it’s best to check early on whether your rate is portable.
The decision will be based on each borrowers circumstances and the cost between the 2 options. Your mortgage broker will be able to compare options so you can see which would be better for you.
Why would you want to port a mortgage rate?
If you have a good relationship with your lender and you’re happy with the interest rate product then you can take this with you when you move home. This process is called ‘porting‘ an interest rate product. By porting the rate you will not be incurring the early repayment charges.
As well as saving on the exit fees, porting a rate can be beneficial if the other interest rates have all increased. Your fixed rate is fixed and so the repayments on that portion of your mortgage will be unchanged.
To port your mortgage, you’ll need to find a new property to buy that’s acceptable to your lender and make a full mortgage application with them. They’ll then carry out a new valuation on the property and provide you with a new mortgage offer.
If you’re not sure what to do, the best thing to do is speak to a mortgage broker. They’ll be able to assess your individual circumstances and recommend the best course of action for you.
Guide to applying for a mortgage
Qualifying for the new mortgage
When you move home you will be applying for a new mortgage arrangement on a new property. Whether you stay with your current lender or apply to a new one, both will conduct the same financial checks on you.
This means looking at your current income and outgoings as well as any dependents or other financial commitments – such as credit card debts or personal loans – that you might have. They’ll also look at things like employment status and previous credit history.
It is therefore possible that you may not qualify for a new mortgage with your current lender. This could be because of many different issues which could include the lender changing their criteria, or maybe your income or credit status has materially changed since you first applied.
Paying the exit fees and applying with a new lender is the only choice in this situation if you still need to move home.
Acceptable properties
All lenders have their own criteria and preferences for the types of property that they will accept. To be able to successfully port your mortgage over to a new house, it needs to be approved by your lender.
Most houses and flats for sale should not cause lenders too many concerns. But there are three broad aspects that they need to be happy with:
Tenure
This is the legal structure of ownership. The tenure of most properties is either freehold or leasehold.
You need to be careful with the remaining number of years left on the lease for a leasehold property. Freehold houses are normally quite uncomplicated but if there’s a flying freehold then this could cause some issues.
Construction
Most properties are built using standard construction methods; brick or block walls and a tiled roof.
Properties that deviate from this can be categorised as having non-standard construction. For example; a thatched cottage, a PRC concrete house or a steel framed property. These will not be acceptable to all lenders.
Condition
A lender needs your property to be habitable on the day of completion.
So the property needs to be fully weatherproof, with running water and a working kitchen and bathroom.
If not, then a surveyor may class the property as uninhabitable, which will cause mortgage complications.
What happens if I need a larger mortgage?
If you need to borrow a larger amount than your current mortgage, you might be able to port your deal and also add on an additional amount of borrowing. However, this will depend on the LTV limit of your current deal as well as your lender’s affordability criteria.
Let’s say that you are porting £100,000 from one property to another but need an extra £50,000 on top. The original 100K keeps the same interest rate which is transferred, or ported, to your new home. The extra 50K will be on a different interest rate product, according to what the lender has available.
What if you don’t need another mortgage?
Avoiding ERC’s by porting requires you to keep a mortgage arrangement going with your lender.
If you need to move home but won’t require a mortgage to do so then you will need to pay the ERCs on repayment (redemption) of your mortgage. These are paid by your solicitor once the sale of your home goes through and the mortgage is redeemed.
How can a mortgage broker help?
When it comes to finding the best mortgage deal, it really pays to speak to an expert. Mortgage brokers have access to the whole of the market, so they can find you a competitive deal that meets your needs – whether you’re looking to port your mortgage or not.
There’s many advantages to using a broker and an independent mortgage broker can provide an unbiased opinion on which option is the best for you.
