Why now might be the time to ditch your ‘Liz Truss mortgage’

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It’s been a little over a year since the fallout from Liz Truss’s mini-Budget sent mortgage rates to a 14-year high.

Lenders scrambled to keep up with market volatility, pulling a record number of deals as the average rate on a two-year fixed-rate mortgage soared to a peak of 6.65pc on 20 October 2022, according to analyst Moneyfacts.

Homeowners who were due to remortgage weren’t left with many options. While many took their chances with “tracker” mortgages, which follow the trajectory of the Bank Rate, not knowing what the economy was going to do next saw thousands lock into two-year or five-year fixes, which were at their highest since the 2008 financial crisis.

These homeowners may now be regretting their decision. As inflation eased throughout the latter half of last year, mortgage rates fell; last month even saw a “rates war” kick off the new year as lenders looked to capitalise on pent-up demand following a 28pc drop in gross mortgage lending last year.

Although the Bank of England’s Monetary Policy Committee voted to hold interest rates at 5.25pc – where they’ve been stuck since August – markets are anticipating a cut potentially as early as May, and major lenders have continued to slash lending rates regardless.

The cheapest two-year fixed-rate mortgage at the time of writing is 4.43pc, offered by Leeds Building Society, according to brokerage L&C Mortgages. For five years, the cheapest rate available is 3.93pc from Cumberland Building Society. However, for both deals there is an initial £999 fee.

For those stuck on a far higher rate from 2022, you may be wondering whether it’s worth switching to one of these cheaper offers. Here, Telegraph Money explains what to consider before leaving a fixed mortgage early, and who might stand to benefit from ditching their deals.

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The cost of leaving a fixed rate early

In return for promising borrowers the same interest rate for the duration of the deal, fixed-rate mortgages come with a significant snag: Early Repayment Charges (ERC).

A lender will have calculated a certain guaranteed amount of interest it will earn from a mortgage borrower during the fixed term, so opting to leave early means the lender is missing out on that cash. ERCs recoup some of this money.

What you’ll be charged varies depending on the terms of your deal, but in general you’ll pay more the longer you fix, and the earlier you leave.

David Hollingworth, associate director at L&C Mortgages, said: “ERCs can be substantial and could be of the order of 5pc of the mortgage amount. This will vary by deal and lender, and many deals will see the ERC fall each year of the fixed rate, for example stepping down from 5pc to 1pc year by year for a five-year fixed-rate.

“The aim is ultimately to save more over the remaining period of the current fixed rate than the cost of the ERC.”

However, it’s not the only factor to bear in mind. Rachel Springall, financial analyst at Moneyfacts, said borrowers need to express caution and understand “the overall true cost package before knowing if it’s the right deal for them.”

This means the need to account for other factors, such as whether potential new mortgage deals come with fees, how much cheaper it is than your current deal, what the new deal charges for ERCs, and whether you could be better off waiting for rates to drop further.

To understand whether homeowners can save money by refinancing right now, Telegraph Money has created three different scenarios to explore what potential savings you could make. All scenarios are based on applying for the cheapest rate available on 8 November 2022 for a £250,000 mortgage over 25 years, and the cheapest rate available now.

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Scenario 1: You’re in the middle of a five-year fixed-rate mortgage deal, with a 40pc deposit

As interest rates soared in November 2022, some buyers and homeowners who needed to remortgage were drawn to longer-term fixed-rate mortgages to shield themselves from the worst of the rate rises, seen in shorter-term products.

First Direct offered the best five-year fixed-rate at 5.19pc, according to L&C Mortgages. Assuming the deal was completed in January 2023, homeowners would have been paying £1,489 per month on repayments for the past 13 months, and would now have £244,556 remaining on their mortgage.

With this deal, mortgage holders can walk away by paying a 2pc early repayment charge on the remaining balance, meaning the cost to exit is £4,891.

Applying for a new mortgage, borrowers could join HSBC, which is offering 3.99pc interest on top of an initial fee of £999. Monthly payments would fall to £1,324, a £166 saving per month compared to the current deal.

It means switching would save you £7,782 across the remaining period. However, that is of course set against your early repayment charge as well as the new joining fee, which together total £5,890.

Overall saving for switching: £1,892


Scenario 2: You’re a first-time buyer on a five-year fixed-rate mortgage, and paid a 10pc deposit

The best deal for homeowners who borrowed 90pc of the property’s value from a lender also came from First Direct, at 5.44pc interest.

Having paid £1,526 every month since January 2023, the borrowers would now have £244,750 remaining on their £250,000 mortgage, and have reduced their loan-to-value ratio to 88pc.

The cheapest deal they could get now is 4.43pc, offered by Cumberland Building Society. You’d pay £1,384 per month, meaning a monthly saving of £142.

While switching early would save you £6,672 overall, there are similarly high fees involved. First Direct charges a 2pc ERC which, combined with the £999 joining fee, would cost you £5,894. The overall saving, therefore, might not be worth the hassle.

Overall saving for switching: £778


Scenario 3: You’re on a two-year fix with a 25pc deposit

The key difference to switching from a two-year fixed-rate mortgage is you’ve not got the same amount of time in which to benefit from the potential savings; in our scenario, you’d be free from the deal in 11 months time if you waited to remortgage at the end of the term. This means that for most, it does not make sense to pay the penalty fee for leaving.

For example, if you signed up to a two-year fix with Principality Building Society at 5.60pc and began your repayments in January 2023, you’d still face a 1.5pc ERC despite being more than halfway through the deal. With a remaining balance of £244,872, that is £3,673.

Moving to the cheapest deal available today from Cumberland Building Society drops the interest to 4.36pc, meaning you’ll save £175 a month. While that is a significant saving to your household finances each month, between now and January 2025 it’s only a saving of £1,922 thanks to the £999 fee. Set against the cost of switching, this means you’d actually lose close to £3,000.

Overall saving for switching: -£2,750


While everyone’s circumstances are different, generally speaking, the longer you have left of an expensive fixed-rate deal, and the lower the ERC, the more likely this could be a solution worth pursuing.

Both two-year and five-year fixed mortgage rates are expected to continue to fall throughout this year. Analysis by Capital Economics forecasts average five-year fixes will drop to 4.18pc by August, and to 3.88pc by December.

All this means while currently it might only make sense for a small proportion of borrowers to make the switch, homeowners should be open and ready to seize the potential opportunity in the next 12 months.

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