Q I’m a 42-year-old full-time professional and in a rather fortunate but tricky situation, which I would like your help with. My seven-year fixed-rate mortgage is coming to an end on 2 May 2023, after which I am not sure whether I should remortgage or pay off the balance.
I have about 20% of the mortgage left, which I could pay off as of today. However, I would incur an early repayment charge of just over £3,000, so I think I’d better wait until the fixed deal expires as the charge no longer applies once the mortgage is on a variable rate. If it’s paid off, I’d still have a bit of a safety net of about £10,000 left for any emergency expenses.
However, I am thinking of buying a new property in the near future and rent my current home out as it was always intended to be an investment, given its fantastic location near Elephant and Castle in London, just on the border of the tube zones 1 and 2, right in the middle of the regeneration area.
Should I pay off my remaining balance in May, be mortgage free then rent it out and start saving for a deposit for a second property or would I be better off using that large chunk of money towards the deposit for the second property and take a mortgage out on the 20% still remaining, hoping to get a favourable rate, given my large equity in the property already?
A I think it might be an idea to have a chat with your lender as even with fixed-rate mortgages you are usually allowed to overpay 10% of the outstanding loan each year without having to pay an early repayment charge (ERC). It would also be a good idea to ask your lender what its position would be if you decided to rent your property out. Would it give you “consent to let” without changing the terms of your mortgage (and for how long) or would it insist that you switched to a buy-to-let mortgage? If the latter, switching to a buy-to-let mortgage before May next year would mean repaying your current residential mortgage early and so generate an ERC. So I suggest that you wait until May next year if you would have to switch to a buy-to-let mortgage. Even if you would get your lender’s consent to let, I would still wait until next May, or at least until you have found your second property and have moved into it. Otherwise, letting your current home to a tenant would leave you without anywhere to live or renting somewhere, which doesn’t seem very sensible.
The most straightforward thing to do would be to pay off your mortgage in May rather than going on to your lender’s standard variable rate. This is because the money you save on the mortgage is more than the interest you can earn on your savings. Once you have found your next home, talk to an independent mortgage adviser about the best way to raise money from your current property – by taking out a buy-to-let mortgage on it, for example – and arranging residential mortgage finance for the new property. Bear in mind that you will be liable for the higher rate of stamp duty land tax on the purchase price of your new home.