We took a gamble and emptied our kids’ savings to remortgage our house early – it could save us thousands
AS parents, the thought of emptying your kids' savings account to remortgage your house early may seem extreme.
But that's exactly what Lydia and Paul Joseph did - and they claim the move could save them THOUSANDS of pounds in the future.
Lydia, 34, who works for a research company and 42-year-old freelance writer Paul’s, mortgage deal is due to end in April next year.
They bought their home in Faversham, Kent, in October 2020 for £485,000, where they live with their kids Louis, 8, and Ines, 6.
They are currently on a three-year fixed rate mortgage at 2.08% with Barclays - paying £1,713 a month.
But the couple were worried that soaring interest rates could mean their monthly repayments could rocket when their deal runs out in April 2023.
Read more in Money
They started to wonder if it was worth re-mortgaging early and Lydia went to her current lender - Barclays - to find out her options. It said she could lock in a fixed rate of 2.7% for seven years.
But getting a new deal early would involve a hefty early repayment charge.
These fees are charged by banks to end your mortgage early and they are usually a percentage of the amount owed, so can easily cost tens of thousands of pounds.
In Lydia's case, it meant spending £12,400 switch to a new fixed deal.
To raise the cash, she took £6,500 from the savings pot of her two children.
The other £5,699 was taken from Paul's personal savings account, which he uses to save for his pension.
“It’s a huge sacrifice,” Lydia said.
“That’s my kid’s college money - and it’s a gamble. But based on what I’ve been reading, I think it will pay off.”
Most read in Money
Lydia used a new calculator from Nous to work out her options.
It takes into account how much you have left on your mortgage, the term remaining on the fixed deal, monthly repayments and the exit charge.
The tool predicts if you will save money even if you pay an early repayment charge, because you'll be avoiding higher interest rates in the future.
Its calculations are based on current estimates that the typical mortgage rate will be 6% by 2024.
At present mortgage rates for a typical two-year fixed deal is 3.95% according to Moneyfacts.
It also calculates if rates rise to 7.75% or 9.5%.
Nous says that the "savings" factor in paying off the early repayment charge.
In Lydia's case she could save up to £13,581 if rates rise to 9.5% or £9,480 if rates rise to 6%.
"It was enough to convince me that paying the early repayment charge and re-fixing now was the right thing to do,” Lydia said.
There's no guarantee Lydia will save as much as she hopes - tools like this are speculative, as we don't know for certain what will happen to interest rates.
If bank rates don't rise as high, the couple won't make the saving and could actually lose money - so it's a gamble.
You also need to factor in your monthly repayments and whether these will be affordable for you now and in the future.
Should I switch NOW and pay an early repayment charge?
You might be tempted to switch now and save on interest repayments in the long-run - even if it means paying an early repayment charge.
Typically, early repayment charges are between 1% and 5% of the outstanding balance on your mortgage.
So if you have a £100,000 mortgage and a 5% charge, you'd pay £5,000.
Experts warn you need to consider the charges carefully before going ahead with any early re-mortgaging deal.
It's only worth doing if the amount you save in interest on a new mortgage deal is greater than that charge.
“You can use calculators online to help with your sums but you need to be 100% sure you understand how they are working out the figures and what their assumptions are,” said AJ Bell head of personal finance Laura Suter.
“A much better idea is to go to a mortgage broker with all your information, and they will be able to accurately work out what rate you’d need to secure to make it worth paying an exit fee."
Emptying your savings account in order to pay the fee could also be risky, Laura added.
“If you leave yourself with no savings to fall back on, or have to pay fees to withdraw your savings, then it’s probably not the smartest move.”
“The cost of living is going to put pressure on a lot of people’s budgets this winter, which means having some savings to fall back on is sensible - once you’ve used your money to pay a mortgage exit fee, there’s no way of getting it back.”
READ MORE SUN STORIES
Read More on The Sun
Here's how a savvy saver stashed away £20,000 in two years with a clever side hustle.
A mortgage expert explains five ways to reduce your repayments.