When you take out a mortgage, the terms of your deal will state:
- The amount you have to repay each month
- The number of years you must repay the loan in (the mortgage term)
- And, in most instances, the mortgage tie-in period, which outlines the minimum duration that you’re expected to stick with a particular mortgage deal
Although these terms may have suited you when you agreed the mortgage, your situation might change over the duration of your deal.
Maybe you find yourself able to repay more than the agreed amount, or maybe, due to unforeseen circumstances, you need to change your mortgage before the finalisation of your tie-in period. In both instances, a penalty fee will most likely apply.
This is what’s called as an early repayment charge (ERC) and it’s one of the number of costs associated with taking out a mortgage.
When might you have to pay an ERC?
You might incur an ERC if:
- You start to make regular overpayments each month
- You come into a lump sum that you want to put towards repaying your mortgage faster
- You need to sell your home quickly – for example, if you’re getting divorced or there’s a substantial change in your financial situation
- You decide to remortgage with your lender or move to a different lender before the termination of your tie-in period
In each instance, your mortgage provider may want to recoup the interest that they miss out on, as they calculate their rates based on the entire mortgage term. An ERC is how the lender does this.
The details of any ERCs should be included in the terms of your mortgage agreement and explained clearly by your lender.
How much is an ERC?
Typically, an ERC is calculated as somewhere between 1% and 5% of the total outstanding mortgage balance, which might not sound like a lot, but can be quite a substantial amount (usually thousands of pounds). This figure may reduce over time, as you move towards the end of your tie-in period.
Alternatively, in some cases, you may only be charged on the percentage you repay over your annual overpayment allowance, which is typically 10% of the mortgage balance each year.
An ERC doesn’t mean that you shouldn’t overpay or repay your mortgage early; however, it’s very important to do your maths beforehand.
The Financial Conduct Authority (FCA) states that ERCs have to be expressed as a cash value and be a “reasonable pre-estimate” of the cost to your lender if you pay back your mortgage early.
Can I get a mortgage without an ERC?
When you apply for a mortgage, you’ll find that most deals which come with low or fixed interest rates also come with an ERC. An ERC acts as insurance for the lender in return for offering you a good deal.
If you are desperate to avoid an ERC, some lifetime tracker mortgages will come without them, but your most likely solution is a standard variable rate (SVR) mortgage.
However, although an SVR mortgage will come with no early repayment charges, the downside is the much higher interest rate you’ll have to pay for the remainder of the mortgage term – something most people cannot afford to do.
What’s an ERC waiver?
If you’re unhappy because your lender has overcharged you when applying an ERC, or if you weren’t told about the charge in advance – you can register a formal complaint.
Your mortgage provider then has the chance to put things right and they’re usually obliged to give you a verdict on the matter within 8 weeks of you making the complaint.
If the lender decides in your favour, they can refund or waive some (or all) of the ERC and may also payout compensation for any additional costs.
If you’re unsatisfied with their decision, you have the option to escalate with the Financial Ombudsman Service.
How do I avoid ERC if I’m moving house?
If you move house, when it comes to ERCs, there are two mortgage options with different implications:
Porting your current mortgage across to the new property
“Porting a mortgage” means taking your current mortgage with you when you move house.
Porting a mortgage usually means avoiding the need to pay ERCs, but this will depend on your lender and mortgage agreement.
Remortgaging with your current lender or a new mortgage provider
Whether you’ll have to pay an ERC will depend on the terms of your existing mortgage and the rules associated to any tie-in period.
If you’re not sure whether to port your existing deal or remortgage, The Your Mortgage People advisors can help you to identify the best way forward.
They’ll be able to put your mind at ease, work out which solution is most cost-effective and take into account the cost ERC that may be payable.
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Our advisors often talk to people who have a large ERCs but still need to release funds. In these instances, a secured loan is often the way to go. If you’re interested in learning more about secured loans, you can find out everything you need to know via our Guide to Homeowner Loans.
Call us on 01489 346624 to get started today, or visit our contact form here.
