Do All Mortgages Have Early Repayment Charges?
Clearing a debt is always a welcome achievement. Whether it be a credit card, a loan or even a mortgage, the relief can be huge. However, in the world of property, things can be a little more complicated. Paying off your mortgage early can result in fees that mean you pay a little more than you may have hoped.
Early repayment charges are common, and many mortgages include them as part of their terms and conditions. Some remove this penalty; however, it can come at a cost.
In this edition of our blog, we look at mortgages and early repayment charges and find some that may save you from this cost.
What is an early repayment charge?
An early repayment charge, or ERC, is a cost you may have to bear should you wish to end your mortgage deal before its term ends. For example, if you currently have a five-year deal but wish to move to another deal after just one year, you may be charged a fee to cover the losses the lender will accrue. Some mortgages also state that you can overpay a certain percentage each year, should that be exceeded, you could also find an ERC being applied.
An early repayment charge can vary in its amount and can very easily reach thousands of pounds. Opting to pay a mortgage early, as a result, should be taken with a great deal of consideration.
Why would I pay my mortgage early if I am going to get charged?
It’s a good question. If you are likely to be billed thousands for trying to end the agreement, why not stick with it and avoid the penalty? Well, it’s not quite as simple as that. The fluctuating rates we have all been experiencing over the past year have led to many more of us shopping around for more favourable deals. Should we then take advantage of them, the original lender will want to recoup their losses as much as possible. It isn’t all down to rates though.
Sometimes other factors can result in us needing to pay off the mortgage early to enable us to move forward.
You are moving house
If you are looking to move to a new home, you will likely be remortgaging. This means you will pay off the outstanding mortgage on your current home and move it to a new lender. This could see an early repayment charge. Portable mortgages are available though which would allow your existing deal to move with you.
Better deals
There could be a host of much more affordable mortgage deals out there that offer you better rates than those you are on now. If you decide to switch lenders to make this happen, you will have to pay back the original mortgage. This will lead to an ERC and could mean you are spending more in total than you had hoped. It would be advisable to find out how much the ERC will be and whether there is still a saving to be made by taking this new mortgage deal.
A change in circumstances
Sometimes, you may be put in a situation where the only option is to sell your home fast and clear the mortgage as quickly as possible. If this is before the end of your current mortgage deal, you could see the early repayment charge applied.
How to avoid early repayment charges on my mortgage
You can avoid an early repayment charge and it can be quite easy to do. You might just have to bide your time. Most mortgages come with an early repayment period as part of their T’s & C’s. If you wait until this period expires, you will be able to avoid the cost. You can also look at the options of sticking to the limit of how much you can overpay each month. That way you can pay it off quicker and avoid the ERC.
What mortgages do not come with an early repayment charge?
You may be able to avoid an early repayment charge altogether by selecting a particular type of mortgage. It should be noted though that these options can cost you more in the long term. That being said, you could also find yourself saving money if rates are favourable. Many mortgages with no ERC are on variable interest rates, meaning they could go down, but also go up. The mortgages you could apply for with no early repayment charge include:
SVR mortgage
The standard variable rate mortgage (SVR) is one where the lender looks at the market and sets its own rates. These mortgages have no early repayment charge but do tend to have higher interest rates. This could be of benefit if you are looking to only use an SVR for a short time before trying to find another deal with a more favourable rate. That way you can leave, with no penalties, whereas if you did not have such a deal and then found a more favourable mortgage offer, you could be hit with huge fees.
Tracker mortgages
A tracker mortgage is another variable mortgage option to consider with no early repayment charge. This mortgage tracks the base rate as set by The Bank of England so rates can go up and down. This can see you pay more but can also see you pay less than other variable rate mortgages.
Offset mortgages
An offset mortgage is an option you could consider taking if you have a savings account. They have no ERC and work by linking your savings account with your mortgage. Your saved funds are offset against the mortgage meaning that the interest you pay is only charged on the difference between the two. You can see your interest payments reduced using this type of mortgage and benefit from saving money over time when compared to other mortgages.
Discounted rate mortgages
A discount rate mortgage is exactly what it says it is. A mortgage with a discounted interest rate. The rates are reduced for a specific period, allowing you to save money whilst rates are low, and then when the discount ends, you can move to another mortgage without having to worry about an early repayment charge.
How much are mortgage early repayment charges?
They will vary depending on the value of the property and how much of the mortgage you have paid back. They are typically worked out based on a percentage of the money you owe. You can normally expect to see an amount ranging from 1%-5% of the amount. The earlier into the agreement, the higher the percentage. This means you could see as much as £10,000 need to be paid if you try and leave the mortgage in as early as the first year. It could be as low as £100 if you have paid most of the mortgage and have a 1% ERC in your mortgage agreement.
You should research all options to see whether it is more cost-effective to accept an ERC and move on with potentially cheaper deals or stick with the agreement you have and avoid the ERC altogether. Much depends on your living circumstances and how affordable this current mortgage is.
Ultimately the decision comes down to you and what you feel is affordable and in your best interests. There are options out there that can help you avoid the early repayment charge but the interest rate can be high. You could always look to a cash house buyer like Gaffsy. We can make a competitive offer on your home and have funds with you in as little as seven days. Allowing you to clear the outstanding mortgage and potentially absorb any ERC that may apply. We buy any house and work to your specific timescale to make sure your fast house sale happens as and when you want it to. Why not find out more from Gaffsy today by speaking to our team of expert buyers? You’ll be able to get a free, no-obligation cash offer on your home, and if you accept it, have the home sold in as little as one week.
