Mortgage lenders have reported an increase in numbers of borrowers who are prepared to pay early redemption charges to get out of existing mortgages to lock into new fixed rates ahead of interest rate rises.
You may remember in the middle of the covid-19 lockdown, we made forecasts of higher inflation to come, stimulated by governments around the world, to devalue government covid-19 borrowing over say a 10-year period. We had originally forecast 5% pa inflation over a period of 10 years. Compounded over 10 years, that would have devalued covid-19 debt by 62.8% and then if inflation stabilises at 2.5% pa for a further 10 years, that’s a compounded devaluation of fixed rate government debts of 80.39% or if payment due at year 25, that would be a compounded devaluation of fixed rate government debts of 90.95%. Therefore, governments want inflation and why we forecast it as well as then interest rate increase counter measures.
None of us could have predicted the Russian invasion of Ukraine. We know that impact this has had on fuel and energy prices and the knock-on effect to the cost of living and inflation being much higher than we predicted. We warned people in April to fix their mortgage rate as we expected rises, we fixed our own at the time in anticipation of interest rate rises. Interest rate rises are here now with many more people expecting to get hit with mortgage rate increases in 2023.
This why many are now looking to remortgage to fixed rates even if they have early redemption penalties.
It is a gamble whether to fix or not. It is a gamble whether you pay early redemption penalties or stay put. You will need to compare the costs of redemption to the potential saving on interest pavements if rates rise in the future and then you must gamble by how much rates will rise further so that you can decide how much you would save by fixing today.
Our view is that this is now a very tough decision. If you had made the decision to fix in say April 2022, we believe it was a ‘no brainer’ but now we think interest rates will likely only rise by another 0.5% to 0.75% pa before falling back.
We believe people that are considering doing this now have ‘missed the boat’. If you have no ERCs then no problem but if you are weighing up redeeming with penalties to lock into a fixed rate ahead of any further interest rate increases may be a gamble in the ‘topsy turvy’ world we live in.