Mortgage rates are on the rise and the latest figures, which put inflation at a 40-year high of 9.4%, have prompted serious speculation that the Bank of England Base Rate could increase by 0.5% in August and be at more than 2% by the end of the year. According to data from Moneyfacts, using a typical £250,000 mortgage on the average five-year rate, a 50 basis point jump would add almost £70 to monthly repayments.
The knock-on effect of this is that those rising mortgage rates look likely to continue to increase, for the foreseeable future at least.
This raises a difficult question for mortgage brokers. If you have customers whose fixed-term deal is due to expire in the coming months, would it be better for them to pay any ERCs on their existing mortgage, to enable them to refinance now, in the hope of securing a better rate than they might in the future?
This is a tricky question for two reasons. Every customer’s circumstances are different – the loan size, existing rate, potential new rate, cost of ERCs, and other costs all need to be considered on an individual basis to understand the potential benefit of remortgaging before the end of their mortgage deal.
On top of this, any advice to pay ERCs ahead of rates potentially increasing is based on speculation. This may be speculation founded on current evidence, but circumstances can change very quickly and any advice that is based on speculation presents an opportunity for a customer to complain that it was incorrect advice further down the line.
So, would it be better for some of your customers to pay the ERC on their current mortgage in order to secure a new deal ahead of any further, likely, rate increases?
Yes, probably, for some of them at least. But advising this course of action also has many pitfalls.
If you do have customers for whom the sums are clearly and significantly stacked in the favour of acting sooner rather than later, even considering the costs of ERCs, then it may be worth a conversation with them to understand their circumstances, outlook for the future, and appetite for risk.
In circumstances such as this, some customers will be more inclined to evaluate paying the fees now, whereas others will be more inclined to risk holding off to wait and see what happens. However, most economists like Andrew Bailey and all Prime Ministerial candidates are not predicting a decline in inflation anytime soon and as a result, interest rates are forecasted to rise. Therefore, customers may gain greater confidence to secure a rate and mitigate future uncertainty.
If you do have customers whose preference is to pay the ERCs in the hope of securing a lower rate, it is important to ensure that they understand the risks in doing this. While it may save them money in the long run, it may also cost them more if the savings don’t outweigh the costs. It would also be sensible to document these conversations and record that they understand the risks associated with this course of action.
And, of course, if your customers do wish to proceed down this route, it is important you work with a lender that you can trust to deliver quick service and fast turnaround times, to give your application the best chance of being offered at the original rate for which you apply. Take a look at lender websites to understand their current service levels and make sure you are making an informed choice.
In a rising rate environment, paying ERCs to remortgage sooner rather than later can be beneficial for customers, but there are many considerations for brokers. This is an area where it’s advisable to take a belt and braces approach.
Ryan Brailsford, Business Development Director at Pepper Money