If you’re lucky enough to be able to pay off your mortgage early or if you’ve found a better deal then that’s a wonderful thing! But just make sure you’re not opening yourself up to early repayment charges (ERCs) that could obliterate any savings you might make by switching.
Working out how to avoid mortgage early repayment charges is something best considered when you first agree a new mortgage and review your loan terms and conditions.
Essentially, paying off your mortgage early or ending your current mortgage deal to switch could potentially cost you thousands of pounds in charges, so it pays to understand what to look out for to minimise these potential expenses.
Make sure you take the time to consider the impact that changing your mortgage deal or making early repayments will have before you make any big decisions.
What are early repayment charges?
An early repayment charge – or an ERC – is something that most borrowers face if they want to change or end their current mortgage deal early.
ERCs are used to both deter borrowers from leaving their current mortgage deals and for the lender to recoup any costs and lost profit margins
The deal is not the entire term of the mortgage, the deal is the initial period you gain a specific benefit from. The most common type of mortgage deal is securing a fixed rate of interest between 2 and 5 years.
The cost of an ERC will depend on your lender and the terms of your mortgage arrangement. Some will charge a fixed fee for early repayments, however it’s more common to be charged a percentage of the remaining sum of the mortgage. This is usually tiered, with a higher percentage earlier on in the deal, reducing at it gets closer to the end.
This could potentially add up to thousands of pounds so be careful that you understand the consequences of going over your repayment limits or leaving your current deal for a new one, whether this is with your original lender or a competitor.
Why do early repayment charges exist?
The way lenders finance mortgages will vary between different banks and building societies. But, the ultimate goal for the lender is to make eventual profit from the interest you pay on your loan. The amount of profit they can make will depend on variables like mortgage periods and interest rates.
If you want to somehow change the nature of your deal, or leave the lender completely, this will impact the returns your lender predicted to receive from you at the outset.
So ERCs are used to both deter borrowers from leaving their current mortgage deals and for the lender to recoup any costs and lost profit margins that they can.
The additional charges may be a reasonable price to pay for finding a better deal or paying off your debt early, but this all depends on your specific arrangement. Don’t assume ERCs don’t apply to you or that you will inevitably save money by switching to a better mortgage deal or making early repayments.
Certain lenders offer no-ERC mortgages. This means that borrowers can pay as much of their mortgage back as they want, whenever they want. These tend to be variable rate mortgages.
When do early repayment charges apply?
Added charges are not just isolated to people who want to pay off their mortgages ahead of time. You might also be faced with ERCs if you change your mortgage deal in other ways that could affect your lender’s potential for returns.
Early repayment charges will usually be applicable if your mortgage is not portable.
If you want to switch from your current mortgage deal to another, either with your current lender or a new one, you will generally be charged with early repayment fees. Perhaps you’re switching due to a change in national interest rates or personal circumstances, but you should always consider how you will be affected by your lender’s ERCs and make sure that you will actually save money in the long-term.
If you’re moving house and you’re part way through a fixed rate mortgage or discounted tracker rate mortgage, ERCs will usually be applicable if your mortgage is not portable. As your current lender will lose out on overall interest payments, they will try to deter you from leaving them or at least recoup what they can in compensation for what is effectively the loss of a client.
Another common trigger for ERCs occurs when a borrower wants to pay extra money towards their monthly mortgage repayment to clear their mortgage sooner than was originally planned. Many borrowers decide to make lump sum payments into their mortgages when they inherit money or make returns on certain investments. While this can be advantageous, lenders will usually have a limit to how much you can pay in. Anything above this limit will incur an ERC.
You need to balance the benefits of paying off your mortgage earlier with the costs incurred from ERC penalties.
If you want to switch from your current mortgage deal to another, either with your current lender or a new one, you will generally be hit with early repayment charges (ERCs).
Tips for avoiding early repayment charges
- Don’t exceed your repayment limit - make a note of your current limit and never go over this amount.
- Choose a no-ERC mortgage - some lenders offer deals that don’t include early repayment charges.
- Respect the ERC deadline - after a certain point ERCs will not apply. This is often tied in with the end of your fixed-rate period.
- Port your mortgage - some mortgage deals are portable and allow you to simply transfer your current deal to another property. This will not incur ERCs.
Changing to a different lender?
Your circumstances might mean that you wish to move to a different lender than the one you currently use. This could likely trigger a early repayment charge. However, if you are close to the end of a fixed term mortgage deal, you may be able to negotiate with your lender to have the ERC waived.
Most mortgages come with an initial fixed or tracker rate term, so understanding the completion date on yours will give you a clearer picture of when you might face penalties and how likely it is that your lender will allow you to avoid any hefty ERCs.
Borrowers are typically limited to paying a maximum 10 per cent of their mortgage annually. Increasing this amount could leave you with substantial penalties.
Should you repay your mortgage early?
Like all debt, it’s a good idea to get your mortgage loan cleared as fast as possible (in theory). However, the conditions of your mortgage might make it disadvantageous to pay off your mortgage early and doing so could even end up costing you more money than you’ll save.
Having a clear understanding of early repayment charges is important, so don't act without consulting with your lender about the charges that you’ll face if you repay your mortgage ahead of schedule.
Your monthly mortgage repayments will be based on an agreed arrangement between you and your lender. Often, you are able to overpay about 10 per cent of the total outstanding debt of your mortgage annually. But check with your lender to see if this is the case with your mortgage before making any assumptions.
So paying over the amount without incurring penalties and fees is still possible up to a certain level. Just make sure you don't exceed this limit and you’ll be free of ERCs.
Remember ERC’s are usually tiered, reducing as you get nearer to end of the deal. Factor in savings made by waiting for the next tier to come into effect.