Early repayment charges and the cost of remortgaging

The costs of remortgaging, and particularly early repayment charges, can cut a significant chunk out of any savings you make while switching mortgage lenders and deals.

To get the most out of remortgaging, the trick is to do it when it works for you and that can be any time when the total savings are bugger than the total costs of remortgaging.

However, in the vast majority of cases the very best time will be as you come to the end of your initial period or introductory deal. It's when your savings will be their highest - because you are about to go on to the SVR - and when your costs will be their lowest - because there are no early repayment charges.

Let's look at why early repayment charges are so important to timing your mortgage.

Early repayment charges

Early repayment charges (ERCs) are like the lender's insurance policy should you choose to pay off your mortgage before the full term. Instead of paying months and months of interest, you'll pay early repayment charges instead.

When remortgaging you are basically calling time on your current mortgage deal and searching for something more competitive. When you agree a new deal, your new bank pays off the old mortgage and triggers any ERCs that you may have.

Sometimes early repayment charges may also be referred to as redemption charges.

Do I have early repayment charges?

Most mortgages do. Some mortgage deals are more flexible than others, and are designed for people who want to pay off their mortgage early. With these deals, there is less of a penalty for overpaying on your repayments every month – but if you clear your loan in full, you'll likely have to pay an ERC.

How expensive are early repayment charges?

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

Therefore, early repayment charges are usually a percentage of your 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.

So, let's say you have a 5-year fixed rate mortgage deal on a total loan of £100,000 with a 5% ERC in year one.

That's an ERC payment of £5,000.

By the last year of that 5-year fixed period, however, the early repayment charge percentage has dropped to just 1%

That's an ERC of £1,000.

It only makes sense to exit your mortgage deal early if you stand to save more on a different mortgage than you’d have to pay in ERCs.

How to avoid early repayment charges?

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

Because it could be a really expensive mistake to time all this 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, but you might miss out on a better deal with a different lender.

Your Mojo mortgage advisers will be able to talk you through all the remortgage options available to you.

If you absolutely have to pay an ERC, you could borrow a little extra on your new mortgage to cover it, but remember you’ll be charged interest on it, which makes it more expensive and, if the early repayment charges are high, they could push you into a more expensive LTV band.

Mortgage exit fees

These are not early repayment charges but are a separate charge.

It’s not uncommon for a lender to charge between £75 and £300 to close your account. Your contract will tell you how much, if anything, you’ll be charged. You can also request a redemption statement for a breakdown of charges.

How to avoid mortgage exit fees?

If they are in your mortgage contract, you can't, but not every mortgage deal has an exit fee associated with it.

Deeds release fee

The deeds release fee, which can sometimes be called a generic admin fee, is in the contract to cover the costs of your existing lender forwarding the title deeds of your house to your solicitor.

They can be up to £300.

How to avoid the deeds release fee?

Check your original paperwork, if your deal has a deeds release fee it should be written into the original mortgage offer or key facts illustration. If it's not there, you shouldn't be paying it.

Also, check that you've not already paid it, as sometimes you may be given the option of paying the deeds release fee at the start of the mortgage term.

Arrangement fees

An arrangement fee is what a lender charges for setting up your mortgage and is sometimes called a completion fee. The amount varies from one lender to the next and sometimes on the size of the mortgage. You’ll find details in section 8 of your Key Facts Illustration.

This fee can be called a product fee, a booking fee or an application fee. Confusingly some lenders also have separate booking and arrangement fees, which are both basically the same thing.

Mortgage arrangement fees usually cost about £1,000 but can be as much as £2,000. A separate booking fee is usually around £200.

How to avoid the arrangement fee?

You can either choose a new deal that doesn't have an arrangement fee – there are a lot of fee-free mortgages available (they tend to have higher rates).

Or, you can avoid the arrangement fee, by putting it off and adding it to your mortgage debt. Remember if you do this, you will be paying interest on it every month.

Many people like to add the arrangement fee to the mortgage, but then pay it off with an overpayment in the first month. This allows you to get the mortgage sorted and avoid losing money if the remortgage or house move doesn't happen for any reason.

Again, a good broker will take this fee into account before they give you a recommendation and help you weigh up paying it immediately versus adding it to the mortgage.

Valuation costs

When remortgaging your new lender will want to make certain they know what your house is worth. This allows them to be confident in their LTV evaluation and helps set you an interest rate.

It also helps with their security; if things go wrong and you fail to repay, they can repossess the property and get a decent amount for it when sold.

To do all of this, lenders carry out a valuation of your property when remortgaging and they can charge you a valuation fee for this.

If you do want a mortgage deal that does have a valuation fee, expect to pay between £150 and £1,500, depending on the value of your house.

How to avoid the valuation cost?

If you do want a mortgage deal that does have a valuation fee, expect to pay between £150 and £1,500, depending on the value of your house.

Mortgage broker fees

Personalised advice from a 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 they can take all the fees we've just discussed into consideration too, and help you know the true cost of each mortgage, helping you save more.

But some brokers charge a fee for their service (as well as taking a commission from the lender when you sign up with them too).

On average, brokers fees are around £500.

How to avoid the mortgage broker fees?

You could avoid broker fees by going straight to a lender, but that lender is only going to recommend its own mortgages, which means you could miss out on much better deals elsewhere.

The best way to avoid broker fees is to use Mojo. We can give you a personal mortgage recommendation from more than 90 lenders and we don’t charge any broker fees.

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