If you're a Shared Ownership homeowner, you’ve likely heard about staircasing—the process of buying additional shares in your property. One common myth is that you either need to wait for your fixed rate mortgage to expire before you can staircase, or face a penalty if you get a new mortgage. Fortunately, this often isn’t the case!

Fixed rate mortgages: the basics

First, a quick refresher: a fixed rate mortgage locks in your interest rate for a set period, usually between two and five years. This setup gives you the comfort of knowing your monthly payments won't change, protecting you from any interest rate surprises during this term.

The reverse is also true - if interest rates do fall and are lower than your mortgage rate, you will be paying more than if you were on a variable rate. Furthermore, fixed rate mortgages offer lower flexibility and early payment penalties may apply if you want to repay your outstanding balance off early.

How to staircase while locked into a fixed rate mortgage

When it comes to staircasing during a fixed rate mortgage, you’ve got two main options.

Let’s break them down with an example: imagine you have two years left on your five-year fixed rate mortgage and an outstanding balance of £80,000.

Option 1: Stay with your existing lender (No early repayment charges)

If you choose to stick with your current lender, you generally won't face any early repayment charges

Here’s how it works:

• Your lender will set up a second mortgage for the additional amount you need to staircase. Your first mortgage (£80,000 outstanding balance) remains on the existing fixed rate, while the new mortgage is based on a new mortgage rate (Hooray! The Bank of England just lowered interest rates).
• Since your lender already knows you and your property, the process is usually smoother and faster.

Option 2: Switch to a new lender (Yes, early repayment charges)

If you decide to switch lenders while staircasing, you will likely incur early repayment charges.

Here's how it works:

• When you switch lenders, you’ll get a new mortgage that covers your existing balance (£80,000), the early repayment charges (ERCs), and the additional amount needed to staircase.
• This option triggers early repayment charges (ERCs). These charges are designed to compensate your original lender for the loss of interest they would have received if you had stayed for the full fixed term.
• ERC Calculation: ERCs are typically calculated as a percentage of the outstanding mortgage balance. This percentage often decreases the longer you’ve had the mortgage. In this example, as you only have 2 years left of your 5 year fixed mortgage, you would typically face a 2% penalty on your remaining mortgage balance. This means you would pay an early repayment charge of £1,600 (£80,000 x 2%). If you had 3 or 4 years left on your fixed rate, you would generally face a 3% penalty.

Is Option 1 Always Better?

Generally, but not always the case. While avoiding ERCs sounds great, switching lenders might still be worthwhile if the new lender offers a significantly lower interest rate. Sometimes, the savings from a lower rate can offset the ERC, making the switch a smart move.

How do I know which option to choose?

Before you make any decisions, it’s wise to consult with a mortgage broker or an independent financial advisor (IFA). They can give you personalized advice and help you choose the best option for your situation. They will tell you the best option for you!