What Is The Early Repayment Charge on a Mortgage? Your Complete Guide
Whilst paying off your mortgage early may seem like a smart choice to make, you can often find yourself on the receiving end of some very hefty fees.
Early Repayment Charges, or Redemption Fees, are costly charges that might apply to you if you are looking at paying off a lump sum of your mortgage before your existing deal comes to an end.
In this blog post, we will be looking at exactly what an early repayment charge is, when it is charged, and how it can be avoided.
What is an early repayment charge?
An early repayment charge is a fee that you can incur when you wish to end your mortgage deal before the 'official' deal term ends. An example of this would be if you were on a 3-year fixed rate deal with your lender but after 12 months you decided you wanted to move to a lower fixed-rate, you would end up facing an early repayment charge (ERC).
If you wish to repay a chunk of your mortgage in a lump sum in order to reduce your overall borrowing, then you may be subject to early repayment penalty charges.
This is because your lender expects to make a certain amount of interest by lending you the money for your mortgage on a fixed, or tracker rate mortgage. When you switch or pay off the debt early, they lose money, which is why you may end up facing an early repayment charge.
If you are a homeowner who is paying their lender's standard variable rate (SVR) then ERCs will not usually be a concern for you. Early repayment charges can cost thousands of pounds in comparison to the couple of hundred you may face as an admin fee.
When would a early mortgage repayment charge be applied
There are a variety of situations where you may find yourself being charged by your mortgage lender for ERC. Such scenarios can include:
When it comes to moving house, you will usually be allowed to port your mortgage to a new property.
But if your new property is cheaper, then you will need to use the extra cash from the sale to reduce your mortgage.
However, if you are still tied into your deal, then you may find yourself facing an early repayment charge.
House purchase delayed
When you are moving up the property ladder, you can find that there are sometimes gaps between selling one home (and paying off the mortgage) and buying the next.
If this happens to you, you can end up facing ERCS.
However, you may find yourself entitled to a full or partial refund when you buy your next property.
If before you end your current deal you switch to a new mortgage, it will come with very heavy fees.
Even if you only switch one day early. Before switching to any new deal, be sure you know exactly when the old one ends.
Life can be unpredictable, and sometimes the house we see ourselves growing old in is not always the house that we keep.
Divorce, relocating for work or debt are all reasons why people may find themselves in a situation where they need to sell their home.
However, you will still be liable to pay the ERCS if you are in the middle of a mortgage deal.
How much is an early repayment charge?
There is no one size fits all for how much you will have to pay back in erc. Exactly how much you will have to pay back depends on how much you have borrowed as well as how far into your mortgage deal you are.
The charges are usually calculated as a percentage of the amount still outstanding balance on your mortgage.
This will usually be anywhere between 1% and 5%.
An example of this would be if you are on a 5-year fixed-rate mortgage, you would be charged 5% if you left within your first year, 4% in your second year, 3% in your third one and so forth.
If you have taken out a £200,000 mortgage, if you were to leave in the first year it would cost you £10,000 to pay off the debt in your first year left from your mortgage balance. If you left in the fifth year, it would cost £2,000.
Can I get an early repayment charge refund?
If you are unhappy with the amount that you have been charged by your lender, many people will complain to their lender.
Most lenders will have 8 weeks from receiving a written complaint to finalise their response.
If you have submitted a complaint about your lender and it is rejected, you can then take your claim to the Financial Ombudsman service.
If both your lender and the Financial Ombudsman Service reject your claim, then you will find yourself having to pay the charge.
However, if your lender accepts your claim or at least part of it, then you may be able to get a full or partial refund.
When do people complain to the Property Ombudsman about the charge?
Below are some of the most common reasons that people complain to the Financial Ombudsman Service about their charges:
Your lender did not inform you of the charge when you asked about paying off any or all of your debt
You believe the charge is unfair or too much
Your charge was applied after your home was repossessed
Your lender neglected to tell you about the charge
Compared to how long you have left on your fixed-rate period, you don't believe the charge is fair
You applied to transfer your mortgage to a different property and your lender turned down your offer, then charged you because you have taken out a different mortgage with a new lender
Can I avoid paying an early repayment charge?
Whilst it can be tricky, there are ways around paying the ever-pesky early repayment charge. These include:
One of the best ways to avoid any redemption charges is to avoid overpaying your current mortgage by more than is allowed under the terms.
This is usually by 10% of the outstanding balance each year, but it is worth checking with your lender to avoid overpayments.
Port your mortgage
If you have found a new property that you wish to move to before the ERC period has ended, then it may be possible to port your mortgage.
This means you keep the same mortgage, avoiding a redemption fee.
Add the charge
Although this method is not a way of avoiding the charge, it does mean that you won't have to pay the ERC from your savings.
You will however end up paying more in the long run as a result of the interest that will be charged on your new mortgage.
Don't remortgage whilst you are still in the period when ERCs apply. Typically it is the same length as the fixed rate period but it can be longer.
If you switch deals with your existing lender can trigger you receiving an early repayment charge.
Use mortgages without ERCs
Another way you can avoid early repayment charges is by taking out a mortgage product that does not have any early repayment charges attached.
These are usually mortgages where the money is lent to the lender's SVR.
There is also the sure-fire way to avoid any early repayment charges, which is waiting until your deal ends before you try and switch.
Can I get a mortgage without ERCS?
Yes, you can! Penalty-free mortgages do exist, however, it is a good idea to do thorough research on them before you jump in head first!
You should talk through any mortgages you are thinking of taking out in depth with either your mortgage adviser or mortgage broker.
As we have previously mentioned, early repayment charges work so that the lender is able to make back some of the money they lent you and also discourages borrowers from jumping from mortgage to mortgage.
Even if your mortgage product has no ERC in place, you can expect to pay some kind of fee if you leave your mortgage before the deal period ends.
What mortgages can I get from my mortgage lender without ERC?
Whilst many mortgage products come with an ERC attached, there are many mortgages out there that you can potentially take out if you want to try and avoid redemption fees.
Because landlords are in the business of buying and selling properties, mortgages with no ERCs attached are in high demand.
They are possible to get, but they come with very strict lending criteria. There are options for interest-only, trackers, discounted variable rates and fixed.
Fixed rate mortgages
An advantage to taking out a fixed-rate mortgage is if there are lower interest rates you will be able to secure them for years to come, however, there is less flexibility when it comes to getting out of it.
Depending on your borrower, you may be able to avoid ERC with them.
Equity release mortgages
Although this mortgage type is not as seen as much on the market as the rest are, there are no ERC deals with them.
Standard variable rate mortgages
Once introductory offers come to an end, this type of mortgage will mean that you are working outside of discounted product terms.
Whilst the interest rates that you are paying will be higher, you will typically expect to find that they come with no ERC attached.
When you take out a tracker mortgage, your payments will be in line with the fluctuating Bank of England interest rates.
This means exactly how much interest you pay will be a risk, however, the ERC will often be waivered a lot easier.
If I overpay my mortgage, will I still be charged?
Whether or not you will be charged for paying back your mortgage early depends upon the mortgage product you have taken out, as well as your mortgage lender.
Whilst repaying your mortgage back in the agreed monthly instalments can help clear your debt quicker, making overpayments can lead to you getting charged, unless your mortgage terms clearly state otherwise.
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