Paying an Early Redemption Fee v Remortgage?

Switching to a better mortgage deal can make financial sense if you can get a better deal to suit your specific requirements. In some cases, it can save you thousands of pounds over the life of your home loan or structure your mortgage to meet any changing needs. But there could be a catch. Most lenders will charge you extra fees if you break your mortgage deal early – before the deal term ends. This is known as an early repayment fee/charge, or ERC. Our expert mortgage advisers here at Bristol, Bath and Exeter Mortgages Online will do all the calculations for you to work out when the best time might be to remortgage. Recently, whilst interest rates are still low, we have advised clients to pay their redemption fee and move on to a new fixed term mortgage. Our Advisers will put together a personalised, tailer-made quotation to give you the facts to enable you to make an informed decision.

What is an early repayment charge?

An early repayment charge is a fee you might have to pay your lender if you want to end your mortgage deal before the ‘official’ deal term ends. For example, you have a two-year fixed rate deal with your lender, but you want to move to a lower fixed rate at the end of 12 months. If you were to switch away your lender would charge and early repayment penalty fee. Early repayment penalty charges can also be applied if you want to pay off a chunk of your mortgage to reduce your overall borrowing, but this varies depending on the terms of your existing mortgage.

Lenders charge early repayment fees because they’re expecting to make a certain amount of interest by lending to you on a fixed or tracker rate deal – so paying off your mortgage earlier means they’ve lost money – so they’re passing on this charge to you.  Early repayment charges do not usually apply if you are paying your lender’s standard variable rate – known as SVR - and want to switch away. You may be charged an admin fee to leave your lender, but typically this will be less than a few hundred pounds. In contrast, ERCs could run into thousands.

When might early repayment charges be applied?

There are a few scenarios where you might find yourself facing mortgage early repayment charges. These include: 

• You remortgage too early. If you switch to a new mortgage before the end of your current deal, it’ll come with heavy fees – even if you make the change just one day too early. Make sure to double-check the exact date your mortgage deal contract ends
• You move to a cheaper property. When you move home, you can usually transfer your existing mortgage deal – but what if your new place is cheaper? You’ll want to use the extra cash from selling your old property to reduce the size of your mortgage – but if you’re still tied into a deal, early repayment charges could apply
• You’re selling up. In some situations, like a separation or a move to a different country, you might need to leave your mortgage deal. Similarly, if you hit financial difficulties, you might decide to sell your property, but fees will still have to be paid to close the mortgage if you are in the middle of a mortgage deal
• Your new home purchase is delayed. If you’re moving up the housing ladder, there might be a gap between selling one home (and paying back the mortgage) and buying your next one. In these cases, your lender will charge you early repayment fees – but you’ll usually get a full or partial refund when you buy your next property as long as it doesn’t take more than a few months.

How much do early repayment charges cost?

Early repayment charges aren’t usually a flat rate fee. The cost will usually depend on how much you’ve borrowed (the size of your mortgage) and how far you are into your deal.  Early repayment charges are usually calculated as a percentage of the amount still outstanding on your mortgage. The typical amount is usually between 1% and 5%. Often, the cost depends on how far you are into your deal – so on a 5-year fixed rate deal, for example, you’ll be charged 5% if you leave in your first year, 4% in your second, 3% in the third year, and so on. 

By way of example, if you had a £200,000 mortgage – it would cost £10,000 to pay off the debt in the first year, but if you switched in year five it would be less expensive, at only £2,000.

This also means that early repayment charges are much lower if you’re closer to paying off your mortgage entirely. If you only have £10,000 outstanding, for example, a 1% ERC only comes to £100. If you have the cash, paying back your mortgage in full could therefore save you money on interest.

Is there any way to avoid mortgage repayment charges?

There are some mortgages that don’t come with early repayment charges, so signing up for one of those will mean that you can avoid paying any extra fees if you decide to break your mortgage. Keep in mind, though, that these are almost always standard variable rate or tracker mortgages, and the interest is usually much higher than you’d get on other deals.  Usually, people remortgage at the end of their mortgage deal to avoid being put on to their lender’s standard variable rate – as SVRs can be relatively high. But if you know you’ll be downsizing or selling up shortly, it might be worth sticking with your provider’s SVR for a month or two to give yourself extra flexibility and avoid repayment fees. 

We will be delighted to look at your current mortgage, circumstances and specific needs, and offer you an specific quotation regarding the benefits or otherwise regarding your ERC.

For further details about the services we offer as a fully independent mortgage brokers or any other mortgage information book your FREE CONSULTATION with one of our expert Mortgage Advisers, please contact us

Bristol Mortgages Online         www.bristolmortgagesonline.com  Tel 0117 325 1511

Bath Mortgages Online             www.bathmortgagesonline.com     Tel 01225 584 888

Exeter Mortgages Online         www.exetermortgagesonline.com  Tel 01392 690 888

      Email info@swmortgages.com



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