Q I am a 42 year old full time professional and in a rather lucky but delicate situation, for which I would like your help. My seven-year fixed rate mortgage matures on May 2, 2023, after which I don’t know if I should remortgage or pay off the balance.
I have about 20% of the mortgage left, which I could pay off today. However, I would incur a prepayment charge of just over £3000, so I think I’d be better off waiting for the fixed agreement to expire as the charge no longer applies once the mortgage is variable rate. If paid, I would still have a safety net of around £10,000 for any emergency expenses.
However I am thinking of buying a new property in the near future and renting out my current home as it was always meant to be an investment given its fantastic location near Elephant and Castle in London just on the border of the tube areas 1 and 2, right in the middle of the regeneration zone.
Should I pay off my remaining balance in May, be mortgage free and then rent it out and start saving for a deposit for a second property or should I use that large sum of money for the deposit for the second property and take a mortgage on the remaining 20%, hoping to get a good rate, given my high net worth in the property?
A I think it might be an idea to have a conversation with your lender because even with fixed rate mortgages you are generally allowed to overpay 10% of the outstanding loan each year without having to pay a prepayment charge (ERC). It would also be a good idea to ask your lender what their position would be if you decide to rent out your property. Would it give you a “consent to rent” without changing the terms of your mortgage (and for how long) or would it insist that you switch to a buy-to-let mortgage? In the latter case, switching to a rental mortgage before May next year would mean prepaying your current residential mortgage and thus generating an ERC. So I suggest you wait until May next year if you were to switch to a rental mortgage. Even if you got approval from your lender to rent, I would still wait until next May, or at least until you found your second property and moved into it. Otherwise, leaving your current place to a tenant would leave you with no place to live or rent somewhere, which doesn’t seem very sensible.
The easiest thing to do would be to pay off your mortgage in May rather than switching 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’ve 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 rental mortgage, for example – and arranging residential mortgage financing for the new one. property. Keep in mind that you will be liable for the higher rate of property tax on the purchase price of your new home.