Understanding early repayment charges on your mortgage.
As you settle into your new home, a question might pop into your head. What happens if you want to pay off your mortgage early or switch to another deal if a better one were to come along.? This is where Early Repayment Charges (ERCs) may come in. Understanding them can save you a significant amount of money in the long run.
What are Early Repayment Charges (ERC’s)?
ERCs are fees imposed by your lender if you repay your mortgage in full or make overpayments exceeding a certain limit before the end of your mortgage deal’s fixed or discounted rate period. These charges are essentially compensation to the lender for the lost interest they would have earned from you had you continued with the original repayment plan.
They are commonly encountered when switching to a more attractive mortgage deal mid-term, or when selling a property before an existing deal comes to its end.
How much are they?
Early repayment charges typically range between 1% and 5% of the mortgage balance being repaid. So, if your mortgage balance was £200,000 and you incur an early repayment charge at 3% on the full amount, your fee total will be £6,000. The charge is added to the final balance redeemed when the switch to a new mortgage product / property completes.
Some lenders may charge a set number of days interest as their early repayment charge. So, it is always worth checking the small print on your mortgage deal to be fully aware.
The exact amount can vary depending on:
- The type of mortgage:
Fixed-rate mortgages almost always come with ERCs, while some tracker or variable rate mortgages have flexible features with no penalties payable. - The length of the fixed/discounted rate period:
ERCs are usually higher in the initial years of the fixed/discounted rate period. They can gradually decrease as you get closer to the end. However, check this as some lenders have a flat fee rate throughout the ERC period.
- The specific lender and product:
Different lenders have varying approaches to ERCs. Therefore, it’s crucial to compare offers and check the terms carefully before choosing a mortgage. This is extra important if your plans mean that you will be incurring an early repayment charge at some point.
Are there ways to avoid early repayment charges?
While completely avoiding early repayment charges might not always be possible, there are a few things you can consider:
- Choose a mortgage with a shorter fixed/discounted rate period:
If you want to consider moving house, changing your mortgage deal or terms in a defined timeframe, try to avoid choosing a mortgage deal with ERC’s that continue longer than your plans to do so. For example, you may want to move house again in 2 years’ time to accommodate a new career. If so, a longer term 5-year fixed rate may not be the best option. Even if the interest rate is marginally more attractive on the longer-term deal. Any savings made in the initial 2 years could be wiped out by an early repayment charge payable in year 3.
Some mortgage products feature no ERC charges and unlimited overpayments. These are typically associated with tracker or variable rate mortgages but there are some fixed rates available on occasion. The payable rate of interest may be higher to balance the increased flexibility on offer.
Mortgage Overpayment Guide
Tracker and Variable Mortgages - See if porting your mortgage is an option:
Some, but not all, mortgages can be ported to another property. Porting is where you swap your existing balance and mortgage product from your current house, over to a new property. The benefit of this is that you aren’t actually repaying the mortgage. As such, there should not be an early repayment charge to pay. You also get to keep your current mortgage deal until it naturally comes to its end.
However, you may need to borrow more to complete the move and cover the cost of moving. If this is the case any new borrowing will be taken using a new mortgage deal available at that time. This could leave you with separate mortgage amounts on different deals all with varying end dates.
Check what the options are for porting your mortgage with your lender before putting your house on the market. - Plan your overpayments strategically:
Many mortgage products allow you to overpay a certain amount of your balance each year without incurring ERCs. Make sure you understand what your allowance is and try to stay within it. Allowances are usually reset each year. Some lenders permit a percentage of the balance to be overpaid i.e. 10% each year. While others prefer fixed amounts or small monthly limits. - Calculate the savings:
If you are planning to switch to a cheaper mortgage deal you may be able to save the cost of the early repayment charge.
For example.- Assume you have 2 years left on your current fixed rate and an ERC of £3000.
- The new 2-year fixed mortgage deal saves you £200 per month.
- Therefore, after 15 months you will have recouped the £3,000 ERC and the remaining 9 months you will save the full £200 compared to your previous mortgage.
- This wouldn’t mathematically work out cheaper if you had less than 15 months left on your current deal as you would not recoup the costs in time. However, some people would still be happy to swap over as it means that their overall monthly outgoings would be less in the short term.
Remember:
- Always check your mortgage offer for the specific details regarding ERCs, including the applicable costs and the timeframe during which they apply.
- Before incurring any charges, check if they can be avoided or at least recouped. only pay an early repayment charge if you absolutely must. Timing the date you move into a new home to coincide with the expiry of an early repayment charge is sometimes possible.
- Speak with a mortgage adviser to help you make informed decisions based on your individual circumstances.
By understanding ERCs and exploring your options, you could potentially save yourself a significant amount of money.
Use the comment form below to let us know about your experience with early repayment charges.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this remortgage guide is purely for information purposes only and does not constitute advice.
