Understanding the ins and outs of remortgaging with an early repayment charge (ERC) is crucial for homeowners considering switching their mortgage deal before the end of the initial term. The ERC, essentially a fee charged by lenders for early settlement of the mortgage, can have significant financial implications and thus demands careful scrutiny before making any remortgaging decisions.
In this guide, we’ll delve deep into the topic of remortgaging with an ERC. We will explore its various aspects from a UK perspective – how it’s calculated when it applies, and the regulations governing it. We will also discuss its implications for various scenarios, including property investors and those who might face a change in their ERC.
This exploration is designed to equip you, whether you’re a homeowner, a property investor, or someone interested in financial and mortgage matters, with a comprehensive understanding of the complexities of remortgaging with an early repayment charge. The goal is to provide you with the necessary knowledge to make informed decisions if you’re considering a remortgage, and to help you navigate the potential costs and benefits of this financial move.
An early remortgage refers to the process of switching mortgage deals or lenders before the end of your current mortgage term. This is usually done to secure a more favourable interest rate or better terms, or to release equity from your home.
However, remortgaging early often comes with some financial implications, mainly due to the fact that most mortgage products have tie-in periods, typically the length of the initial deal, for example, two, three or five years. If you remortgage during this tie-in period, you may have to pay an Early Repayment Charge (ERC). This is a fee that your lender charges if you repay your mortgage (or overpay more than the permitted amount) during the tie-in period. ERCs can often be a percentage of the remaining loan, meaning they can be quite substantial.
Therefore, if you’re considering an early remortgage, it’s crucial to calculate whether the potential benefits outweigh the costs of any applicable ERC. It is advisable to seek professional financial advice before making a decision.
An Early Repayment Charge (ERC), sometimes also called a redemption penalty, is a fee you might have to pay if you decide to pay off your mortgage or remortgage during a certain period, typically during the initial fixed, discounted or tracker deal period. This period is often referred to as the tie-in period.
The purpose of the ERC is to compensate the lender for the interest they would otherwise have received if you had stuck to the original mortgage repayment schedule. It’s important to remember that the charge applies not only if you repay the mortgage in full but also if you overpay more than the agreed amount.
So, if you are considering remortgaging, it’s essential to check if an ERC applies and, if so, calculate whether the potential savings from a new mortgage deal outweigh the costs of paying the ERC. Always ensure to read the terms and conditions of your mortgage agreement carefully and consider seeking independent financial advice if needed.
An early repayment charge (ERC) is typically applied in the following scenarios:
Paying off the mortgage early: If you pay off your mortgage before the end of the mortgage term, an ERC may be charged. This could be due to selling your home, coming into money, or choosing to pay it off for other reasons.
Overpayments: Most mortgage agreements allow for a certain level of overpayment, often around 10% of the outstanding balance per year, without incurring charges. However, if you overpay more than the agreed-upon limit within a certain period (usually during the initial fixed or discounted rate period), an ERC may be applied.
Remortgaging: If you choose to switch your mortgage product or lender (known as remortgaging) during the initial tie-in period, you may be liable for an ERC. This could happen if you find a better deal elsewhere or if your circumstances change and you need a different type of mortgage.
Transferring the loan: If you move your loan to another property (known as porting your mortgage) during the tie-in period and the lender doesn’t agree to it, an ERC might be applied.
The exact conditions and timing of when an ERC would apply can vary greatly between different mortgage products and providers, so it’s crucial to understand the terms and conditions of your specific mortgage agreement.
A fixed-rate mortgage is a type of mortgage where the interest rate remains the same for a set period of time. This period is often 2, 3, 5, or even 10 years, depending on the specific mortgage product.
The main advantage of a fixed-rate mortgage is that it provides certainty. Your monthly mortgage payments will stay the same throughout the fixed-rate period, which can make budgeting easier. You are protected from potential interest rate rises during the fixed term, which could otherwise increase your repayments.
However, the flip side is that if interest rates fall, you won’t benefit from reduced payments. Additionally, fixed-rate mortgages often come with Early Repayment Charges (ERCs). This means that if you want to remortgage or pay off a significant portion of your mortgage during the fixed-rate period, you may have to pay a fee.
After the fixed-rate period ends, your mortgage will typically move onto the lender’s Standard Variable Rate (SVR), which is usually higher. At this point, many people choose to remortgage to another fixed-rate deal to continue having predictable repayments.
As with all mortgage products, it’s important to consider your personal circumstances and perhaps seek financial advice before deciding if a fixed-rate mortgage is right for you.
Remortgaging with an early repayment charge (ERC) can be a complex decision to make. There are a few key advantages and disadvantages to consider:
Pros of Remortgaging with an ERC:
Better Interest Rates: One of the main reasons homeowners decide to remortgage, even with an ERC, is to take advantage of lower interest rates. If you can secure a significantly lower rate, the amount you save on interest may outweigh the cost of the ERC.
Better Terms: If your current mortgage doesn’t fit your needs – perhaps it lacks flexibility, or you want a product that allows overpayments without penalty – it might be worth remortgaging even if you have to pay an ERC. The benefits of a new mortgage could outweigh the cost of the charge.
Financial Stability: If you’re currently on a variable rate mortgage and are worried about potential rate increases, remortgaging to a fixed rate mortgage could provide stability and certainty, even if you have to pay an ERC.
Cons of Remortgaging with an ERC:
Added Cost: The most obvious disadvantage of remortgaging with an ERC is the cost. ERCs can be quite substantial, sometimes amounting to thousands of pounds. This added cost could potentially negate any financial benefits of a new mortgage deal.
More Debt: Adding an ERC to your new mortgage will increase the overall amount you owe. This means it could take longer to pay off your mortgage, and you’ll pay more interest over the life of the loan.
Complexity: Working out whether it’s worth remortgaging with an ERC can be complicated. You’ll need to calculate the potential savings of your new deal, taking into account the interest rate, term, fees, and the ERC.
In any case, if you’re considering remortgaging with an ERC, it would be wise to consult a financial advisor or mortgage broker to help you crunch the numbers and understand whether it’s the best move for your situation.
There are several reasons why you might choose to remortgage early, even if it means you might incur an early repayment charge. Here are some common motivations:
The cost of leaving a mortgage early can vary greatly and depends on the terms and conditions of your specific mortgage contract. Here are some factors that might affect the cost:
Typically, an Early Repayment Charge (ERC) is not refundable once it’s been paid. It’s a fee charged by the lender to compensate for the interest they will lose if you repay your mortgage early or overpay more than your agreement allows during a specific period.
However, there could be circumstances where you may be able to claim a refund or not have to pay an ERC:
Cooling-off Period: Some mortgage contracts may include a ‘cooling-off’ period after remortgaging during which you can change your mind without incurring an ERC. This is typically a short period, often 14 days.
Porting your Mortgage: Some mortgage products allow you to ‘port’ your mortgage to a new property. This means you take your current mortgage deal with you when you move house, potentially avoiding the ERC. But this is subject to the lender’s agreement and meeting their criteria for the new property.
Complaints and Compensation: If you feel you weren’t adequately informed about the ERC when you agreed to the mortgage, you could make a complaint to the lender. If they don’t resolve it to your satisfaction, you can take the complaint to the Financial Ombudsman Service.
Certain Life Events: Some lenders may waive the ERC in specific life events like a death, divorce or redundancy, but this varies from lender to lender.
Always check the terms and conditions of your mortgage agreement to understand the rules around ERCs, and consider seeking independent financial advice if needed. It’s also a good idea to have an open conversation with your lender about your circumstances.
Yes, you can remortgage even if you’re not on a fixed term. When you’re on a variable rate or tracker mortgage, you can remortgage at any time without incurring an Early Repayment Charge (ERC).
Many homeowners choose to remortgage at the end of their fixed term to avoid their lender’s Standard Variable Rate (SVR), which is often higher than other available rates. But if you’re already on a variable rate, there are still reasons you might want to remortgage:
Yes, there are several ways you might be able to avoid an Early Repayment Charge (ERC):
The amount you can borrow when you remortgage depends on several factors:
Your Home’s Value: The value of your home determines how much equity you have available to borrow against. If your property’s value has increased significantly since you bought it, you may be able to borrow more.
Loan-to-Value Ratio (LTV): LTV is the ratio between the amount you want to borrow and the value of your property. The lower the LTV (i.e., the more equity you have in your home), the more likely you are to access better mortgage deals.
Your Income: Lenders will look at your income and expenditure to determine how much you can afford to repay each month. This will affect the maximum amount you can borrow.
Credit Score: Your credit history and score are important factors. A good credit score can make it easier to borrow more and access better interest rates.
Existing Debts: If you have significant existing debts, lenders may be more cautious about how much they’ll let you borrow.
Interest Rates: The available interest rates will also impact how much you can afford to borrow, as this will influence your monthly repayments.
It’s important to note that while you may be able to borrow more through remortgaging, it’s crucial to ensure the repayments are affordable. Borrowing more will likely increase your monthly payments and the overall amount you repay over the term of the mortgage.
Equity and Loan-to-Value (LTV) are crucial factors when considering a remortgage for several reasons:
The Early Repayment Charge (ERC) for remortgages is typically calculated as a percentage of the outstanding mortgage balance at the time you decide to remortgage. This percentage can vary depending on the terms and conditions of your specific mortgage agreement and the point you are at in your mortgage term.
Typically, the ERC is higher earlier on in your mortgage term and decreases over time. For example, if you have an outstanding mortgage balance of £150,000 and your ERC is 3%, the charge would be £4,500.
However, the exact details can vary from lender to lender and from one mortgage product to another. Some lenders may have a flat ERC throughout the fixed term, while others may not have an ERC at all. Therefore, it’s essential to check your mortgage agreement or speak with your lender or a mortgage broker to understand how your ERC is calculated.
Whether or not you’ll be charged an Early Repayment Charge (ERC) for overpaying on your mortgage depends on the terms and conditions of your specific mortgage agreement.
Many mortgage products allow you to overpay a certain amount each year without incurring an ERC. This is often up to 10% of the outstanding balance, but it can vary between lenders and mortgage products. For example, if your outstanding balance is £200,000 and your agreement allows you to overpay up to 10% per year without penalty, you could make an additional payment of up to £20,000 in a year without being charged.
However, if you overpay beyond the limit stated in your agreement during the initial period (usually the fixed, discounted, or tracker term of the mortgage), you may be charged an ERC. This charge can be significant, so it’s important to understand the terms of your mortgage before making overpayments.
In some cases, if your mortgage is on a variable rate or the initial period has ended, you might be able to overpay without incurring an ERC.
Every mortgage is different, so always check the terms and conditions of your specific agreement or speak with your lender or a mortgage broker to understand when an ERC might apply. It’s crucial to understand the potential costs and benefits before deciding to make overpayments or remortgage.
Calculating how much equity you have in your property involves two steps:
Property Value: First, you need to know the current market value of your property. This could be based on a recent valuation, the purchase price if you bought it recently, or an estimate from online tools or local estate agents. Keep in mind the real value will only be determined if you were to sell or get a professional appraisal.
Outstanding Mortgage: You also need to know how much you still owe on your mortgage. This information should be available on your mortgage statement, through your online banking portal, or by contacting your lender.
Once you have these two pieces of information, you can calculate your equity by subtracting your outstanding mortgage balance from the current value of your property.
For example, if your home is worth £300,000 and you have £150,000 left to pay on your mortgage, your equity would be £150,000.
It’s worth noting that the amount of equity in your home can change over time as property values fluctuate and as you gradually pay down your mortgage balance.
Remortgaging early can be a big decision, and there are several factors that you should consider before you proceed. Here are a few:
Seeking advice from a mortgage broker or financial adviser can be very beneficial if you’re considering an early remortgage. These professionals can provide tailored advice based on your personal circumstances. Here are a few key points to keep in mind:
Remember, while advice can be very helpful, it’s still important to understand the advice you’re being given and to make sure it’s right for you. Don’t be afraid to ask questions and make sure you understand the potential costs and benefits before proceeding with an early remortgage.
The cost of an Early Repayment Charge (ERC) can vary greatly depending on the terms and conditions of your specific mortgage agreement.
The exact percentage can range from 1% to 5% or even higher, and it often decreases each year during the tie-in period. For example, you might pay a 5% charge if you leave in the first year of your mortgage, 4% in the second year, and so on.
No, not all remortgages are subject to an Early Repayment Charge (ERC). Whether or not an ERC applies, and how much it would be, depends on the terms of your specific mortgage agreement. ERCs are typically associated with fixed-rate, discount, and tracker mortgages during the initial deal period. If you’re on a Standard Variable Rate (SVR) or if your initial deal period has ended, an ERC typically won’t apply. There are also some mortgage products that don’t have ERCs at all.
Always check the terms of your mortgage or speak with your lender or a mortgage adviser to understand whether an ERC applies.
The Financial Conduct Authority (FCA) does regulate mortgage lenders, including how they handle early repayment charges. Lenders must clearly explain any ERCs to you before you take out the mortgage.
If you feel a lender has not treated you fairly with respect to an ERC, you can make a complaint to the lender and, if necessary, to the Financial Ombudsman Service.
For property investors, ERCs can significantly impact the cost-effectiveness of a remortgage. An ERC can make it more expensive to switch mortgage products or lenders, which could limit your flexibility in responding to changes in the property market or interest rates.
On the other hand, if rates have dropped significantly or if you can secure a much better deal, it could still be worth remortgaging even if an ERC applies. Also, for buy-to-let mortgages, ERCs and other mortgage costs can generally be offset against rental income for tax purposes.
If an Early Repayment Charge (ERC) changes and you can no longer afford to remortgage, you might need to stick with your current mortgage until the ERC becomes more affordable or until it no longer applies. This could mean remaining on a potentially higher interest rate for longer, which could increase the overall cost of your mortgage.
If you’re struggling to afford your mortgage payments, it’s important to speak with your lender as soon as possible. They might be able to offer options such as a payment holiday, extending your mortgage term, or switching to interest-only payments for a while.
It’s unusual for an ERC to change partway through a mortgage term, as the ERC terms should be fixed and clear in your mortgage agreement at the outset. If you believe there has been an unjust change to your ERC, you should first raise this issue with your lender.
If you’re not satisfied with their response, you can make a complaint through their formal complaints procedure. If you’re still not satisfied, you can escalate your complaint to the Financial Ombudsman Service.
The terms and conditions associated with ERCs, including any changes to them, are typically set out in your mortgage agreement, and these can vary from lender to lender.
However, the process for changing any terms in the mortgage agreement, including the ERC, should be regulated by the Financial Conduct Authority (FCA). This means that any significant changes would generally require your agreement. In practice, changes to an ERC partway through a mortgage term are very unusual. If you’re concerned about changes to your ERC or other mortgage terms, you might consider seeking advice from a legal professional or a mortgage adviser.