LIBBY is in her late thirties and owns a flat worth £165,000. She has a fixed-rate mortgage of £155,800 with the Halifax. It is interest-only with an interest rate of 4.49 per cent and ends in September. Her monthly payments are £571. She is worried that she is not paying off any of the mortgage and estimates that she could pay up to an extra £100 a month. Is there any chance of her being able to afford a repayment mortgage? She realises that her current rate will end shortly, but is concerned about the potential for further interest-rate rises and wonders if it would be a good idea to change her deal now.

Jonathan Cornell, of Hamptons Mortgages, says:

I am afraid that Libby has missed the boat if she wants to beat rate rises: most lenders have factored in one more potential rise into their current fixed rates. However, most experts believe that we are probably at the top of the interest rate cycle, so rates should start to fall in the next couple of years.

Over the past five weeks swap rates, which lenders use to fund their fixed rates, have been falling (by about 0.30 per cent since their peak in February), so it is likely that fixed rates will become cheaper than they are now.

Libby is in the fortunate position that she is on a very good rate that is below any fixed rate she could get now unless she paid a vast fee (which would be uneconomical). Most lenders normally expect borrowers to change to the new fixed rate within three months, so Libby is starting the process a bit early. If she did change her mortgage now she would have to pay an early repayment charge, which is typically 2 per cent of the amount outstanding. For Libby this would be about £3,100, so changing now would be foolish.

Libby is again fortunate that she is with the Halifax, which offers good new rates to its existing borrowers. However, she needs to wait until three months before the end of her mortgage. At the moment she can reserve her new rate from the Halifax, and then it is likely that the Halifax will allow her to move to the new rate before her existing rate finishes, although if the new rate is worse she will want to stay on her existing rate as long as she can.

It would not make financial sense for Libby to switch now. However, if she still chose to go ahead, she could have a two-year fixed rate at 5.14 per cent with a £999 fee or another two-year fixed rate at 5.49 per cent with a £299 fee (both with the Halifax). Based on the size of her mortgage she would be better off with the higher fee and the lower rate, as the interest saving would more than pay for the extra fee.

Assuming that Libby’s mortgage went to 5.14 per cent, then the interest cost per month would be £667, which is £100 or so more than she is paying now, so I don’t think she could afford to put any of her mortgage on a repayment basis. However, if rates do fall between now and July, then the amount she will pay will come down. Hamptons Mortgages: 020-7220 1000

JARGONBUSTER

What is an Early Repayment Charge (ERC)? This is a charge (sometimes referred to as an early repayment penalty) made by your mortgage lender if you terminate a mortgage in advance of the terms of the mortgage.

ERCs are generally imposed on fixed or discounted mortgages offering a relatively cheap deal for an initial period. They usually run only until the end of the initial cheap deal period, although some mortgages have extended repayment penalties that continue even though you have moved back to the lender’s standard variable rate.

LORNA BLACKWOOD

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