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Check Before Bailing out of Fixed Rate Mortgage

UK Nationwide Building Society May Herald New Trend

Mar 13, 2009 Richard Mudhar

With interest rates falling borrowers may want to bail out of fixed-rate deals by paying an exit penalty. Check with your lender that you can take another deal from them.

As interest rates plummet with governments trying to tackle the credit crunch, borrowers stuck in fixed-rate deals may look longingly at the standard variable rate and consider paying the exit penalites on their fixed-rate deals to get onto a cheaper rate. However, the UK's largest mutual building society, the Nationwide, may be starting a worrying trend, refusing to remortgage borrowers who have bailed out early from a fixed-rate deal with the society even if they have paid the early redemption penalty.

Ask Before You Switch Mortgage to Prevent Unexpected Hidden Costs

Remortgaging with an existing lender is often cheaper, because they have already got the details of the house so they do not need another survey, and some of the legal costs are not incurred. As a result, even if another lender offers a slightly better interest rate, the fact that the loan is not loaded by survey and solicitor's costs may make it cheaper to stick with your current lender and just take a different product or go onto the standard variable rate. However, the Nationwide's new policy may be the beginning of a disturbing trend, since it means borrowers are either locked into fixed-rate deals for the full term of the deal, or they have to got through the process of getting qualified by a new lender if they want to switch early.

This may be one of the ways that lenders try to reduce their loan book. The credit crunch has made wholesale capital more expensive to raise, and there is less wholesale capital available. The Nationwide raises less of its mortgage lending on the wholesale capital markets (31% as of 2008) than many of its competitors do. It raises the bulk of its mortgage lending in the traditional way from its savers. It is not obvious why it should be the first British mortgage lender to change its policy in this way. However, where it leads, other lenders may follow as they try and raise profitability.

Overall, British mortgage applicants considering a fixed rate deal may want to ask their prospective lender before they start trying to get out of the fixed rate product whether the lender has a policy of barring early redeemers from alternative mortgage products. Borrowers already on a fixed rate deal should definitely check their lender's policy before initiating an early switch, otherwise they may find themselves cast out and looking for another lender, incurring new survey and legal fees in the process.

The copyright of the article Check Before Bailing out of Fixed Rate Mortgage in Mortgages/Loans is owned by Richard Mudhar. Permission to republish Check Before Bailing out of Fixed Rate Mortgage in print or online must be granted by the author in writing.