If you’re a homeowner with a mortgage, you’ve probably come across the term ‘Early Repayment Charges’.
These fees can be a significant consideration if you’re thinking about paying off your mortgage early or switching to a different lender. Let’s take a look at what Early Repayment Charges are, how they are calculated, and what you can do to avoid them.
Contact your local Martin & Co branch today for expert advice and guidance.
What are Early Repayment Charges?
Early Repayment Charges (ERCs) are fees that some mortgage lenders impose on borrowers who pay off their loan before the agreed-upon date. These charges are most common when you overpay before the agreed-upon term of a fixed-rate mortgage.
It is essential to carefully review the terms and conditions of your loan agreement to determine if there are any ERCs. Some loans may have no penalties for early repayment, while others may have significant fees.
If you are considering paying off your loan early, it’s crucial to reach out to your lender and ask for information regarding any potential charges that may apply.
Related: Most frequently asked questions about 95% mortgages
Why do lenders charge early repayment fees?
Early repayment fees make up for the interest lost if the loan had continued for its entire duration. ERCs help to offset this loss and ensure that the lender doesn’t suffer financially from early repayments.
How are early repayment charges calculated?
The calculation of ERCs can vary depending on the mortgage terms and the lender’s policies. Typically, you will have to pay somewhere between 1% and 5% of the outstanding mortgage. Some may also have a minimum charge that applies regardless of the remaining loan balance.
Some lenders may charge you less depending on how many years remain on your mortgage term. You are less likely to face a large early repayment fee the closer you are to completing the term.
How to avoid early repayment charges
Get the right mortgage deal
Finding a mortgage lender and a deal that does not charge any early repayment fees can save you money if you end up paying your mortgage off early. However, these are likely to be standard variable rate mortgages, which usually have a higher interest rate.
Find out how much you can borrow
Overpay by the correct amount
Most mortgage lenders will allow you to overpay your repayments by a certain percentage without charge. This is usually up to 10% per year. By doing this, you can pay your mortgage off early while avoiding costly ERCs.
Related: What is mortgage agreement in principle?
Port your mortgage
Porting your mortgage can help you avoid ERCs by allowing you to transfer your existing mortgage to a new property instead of paying it off and taking out a new one. You will continue with the same interest rate, repayment schedule, and terms as your existing mortgage, just on a new property.
Tip: Check with your lender to see if you can transfer your mortgage, as not all mortgages are portable.
How a financial advisor can help
A financial advisor can provide you with crucial assistance in understanding and managing ERCs. They can explain the specific terms and conditions of your mortgage contract. This usually includes how ERCs are calculated, when they apply, and the exact amounts you might be liable for.
They can also assess your overall financial health to determine whether paying the ERCs upfront or porting your mortgage is the best option.
Additionally, they can assist in negotiating with your current lender to see if there are any ways to reduce or waive the ERCs, or help you find a new lender with better terms.
