What are Early Repayment Charges?
An Early Repayment Charge is a fee that mortgage lenders may charge if you pay off your mortgage earlier than agreed. An early repayment charge could be triggered if you make overpayments beyond the agreed limit or if you pay off the entire mortgage balance before the end of the term.
Early Repayment Charges typically apply during the initial fixed rate or discounted rate period of your mortgage, which can range from two to five years. After this period, when you move to the lender’s standard variable rate, Early Repayment Charges usually no longer apply.
What is the cost of Early Repayment?
The amount of an Early Repayment Charge can vary significantly between lenders and mortgage products. It’s often calculated as a percentage of the outstanding mortgage balance or the amount you’re repaying early. For example, a 3% charge on a £200,000 mortgage would result in a £6,000 fee.
Early Repayment Charges tend to decrease over time. For instance, a five-year fixed-rate mortgage might have a 5% charge in the first year, reducing by 1% each year until the fixed period ends.
Early Repayment Charges and Mortgage Flexibility
Most mortgages allow you to make overpayments of up to 10% of either the mortgage principal or the outstanding mortgage balance without incurring an Early Repayment Charge.
Avoiding or Minimising Early Repayment Charges
Some mortgages, particularly variable rate products, don’t have Early Repayment Charges. However, these often come with higher interest rates. To minimize Early Repayment Charges, consider:
- Choosing a shorter fixed-rate period
- Waiting until the fixed-rate period ends before making significant changes
- Using allowed overpayments strategically
Early Repayment Charges and Remortgaging
Early Repayment Charges can significantly impact your ability to switch to a better deal with another lender. Sometimes, it’s possible to add the Early Repayment Charge to your new mortgage, but this increases your overall debt.
Conclusion
Always factor in potential Early Repayment Charges when comparing mortgage offers and planning your long-term financial strategy.
To find out what the rules on early repayments are for your mortgage, check your Key Facts Illustration, or speak to your lender. If you’re unsure, it can be a good idea to consult with a financial advisor or your mortgage broker.