Early repayment charges and the cost of remortgaging

Early repayment charges can significantly reduce any savings you make when remortgaging. In the vast majority of cases, the best time to remortgage is when you’re reaching the end of your initial or introductory deal.

This is when your savings are highest - because you avoid the SVR - and your costs are lowest - because there are no ERCs.

What are early repayment charges?

Early repayment charges (ERCs) are like a lender's insurance policy. They’re a way of reclaiming some of the interest they would lose out on if you chose to pay off your mortgage before the end of the term. 

When you remortgage deal, your new lender pays off the old mortgage, which triggers any ERCs that you may be responsible for. Sometimes early repayment charges are also referred to as redemption charges.

Do I have early repayment charges?

It depends what type of mortgage you have, but most mortgages do have some form of early repayment charge required to leave. 

The exception to this is if you’re on an SVR (standard variable rate). This is like the default rate for each lender, and has no ‘tie-in’ period, so you can switch mortgages whenever you like, without paying to leave. The downside being that they are typically each lender’s most expensive rate of interest. 

Some mortgage deals are more flexible than others, and may have less of a penalty for overpaying each month – but if you repay your loan in full, there will probably still be some ERCs to pay.

How expensive are early repayment charges?

The charges vary from one lender to the next, and depending on how far into your deal period you are. Typically it will be most expensive to leave the deal in the first year, and gradually reduce as time goes on.

The Financial Conduct Authority states your mortgage contract must state the cost of any ERCs as an example cash value and that they must be a reasonable pre-estimate of the costs the lender would incur if the customer repaid early.

Usually ERCs are charged as a percentage of your remaining total outstanding mortgage loan. They often start at around 5% in the first year of a deal and decrease over the course of the initial period - but this does vary by lender.

Example:

You have a 5-year fixed-rate mortgage deal on a £100,000 loan 

with a 5% ERC in year one - you would need to pay £5,000 to leave the deal

If the ERC had reduced by 1% each year then by year 4, you only need to pay has 1% ERCs, or £1000

It’s usually best, therefore, to leave a deal as close to the end date as possible, if you must leave early.

How do I avoid early repayment charges?

The best way to avoid ERCs is to time your remortgage so that it kicks in at the end of your current introductory deal.

Because it could be really expensive to get the timing wrong, it's important to get your lender and solicitor on the same page – something we can help you with.

You could also avoid ERCs by remortgaging with the same lender - known as a product transfer - but you might miss out on a better deal with a different lender.

Our Mojo mortgage advisers can explain all of the remortgage options available to you in detail, to help you decide when the best time to remortgage is, and what’s the best deal for you.

What if I need to move straight away?

Sometimes we can’t plan for what life throws at us, so if you absolutely have to pay an ERC, for example, because you need to move home quickly, it’s possible to borrow a little extra on your new mortgage to cover ERCs. 

However, keep in mind that you’ll need to qualify for the larger loan amount - which could also push you into a higher LTV band, increasing your interest rate. It’s also important to consider that you’d be paying interest on the ERCs that you wouldn’t if you paid them off immediately. 

What other fees will I pay when remortgaging? 

There are other costs than early repayment charges involved with both leaving your existing mortgage and taking out a new mortgage to consider when you’re remortgaging. They won’t always all apply in every case, but often do. Here are the main ones to be aware of:

• Mortgage exit fees - separate from ERCs, this is usually charged to close your account. The typical fee ranges from £75 and £300. A redemption statement will give you a full breakdown of charges to leave your mortgage

• Deeds release fee - sometimes called a generic admin fee, this covers the forwarding of your title deeds to your solicitor. It can be as much as £300

• Arrangement fees - the charge for setting up your new mortgage, sometimes called a completion fee, product fee, a booking fee or an application fee. Fees vary by lender and sometimes loan value. You’ll find details in section 8 of your key facts illustration - They are typically between £1,000 and £2,000, but can be more for large mortgages

• Valuation fees - your new lender will want a current valuation of your property to be confident in their LTV evaluation. Not all lenders charge for this, but many do. Expect to pay between £150 and £1,500, depending on the value of your house.

• Mortgage broker fees - an expert mortgage broker can save you money when you remortgage. For example, not only do brokers know the market well and can help get you the mortgage deal you want, but on average charge around £500.

How to avoid the mortgage broker fees

The best way to avoid broker fees is to use a free mortgage broker, like us, here at Mojo. We can give you a personal mortgage recommendation from more than 70 lenders and we don’t charge any broker fees.

You could also go directly to a lender, but keep in mind they can only recommend their own mortgages - meaning you could miss out on much better deals elsewhere.