Early repayment charges explained

Mortgage lenders lose money if borrowers reduce the funds that interest can be charged on. So when you are buying a house and take out a mortgage product with a promotional interest rate attached, lenders will want to ensure that you do not break the terms of the mortgage deal. They do this by making an early repayment charge, or redemption fee, one of the conditions of the mortgage.

If you are buying for the first time, it is important to understand what early repayment charges are, when they apply and how much they are.

What is an early repayment charge?

Early repayment charges are fees you might be asked to pay by your mortgage lender if you decide to repay the loan earlier than expected. Early repayment charges are also known as redemption fees. Homeowners incur a mortgage early repayment charge if they want to repay their mortgage in full, reduce the amount they have borrowed or move to another mortgage product or to a different lender while still ‘tied in’ to an existing mortgage deal.

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When might an early repayment charge be applied?

You remortgaged too early

If you are tied in to a mortgage product, usually on a discounted interest rate, early repayment charges will apply for the duration of that discounted term. You will have to pay an early repayment charge if you decide to remortgage your property or move to a different lender before the end of any promotional term.

For example, you may have chosen a fixed or capped interest rate product for a five year period. If you repay the mortgage in full during this period you will have to pay an early repayment charge.

You bought a cheaper property to move into

Moving home does not necessarily mean you have to pay repayment charges. You can usually transfer your existing mortgage deal to your new property. However, if you are buying a house that costs less than your current property, you might want to reduce the size of your existing loan. Overpaying a lump sum of your mortgage will incur an early repayment charge.

You’re forced to sell your home

When people take out mortgage products it comes with the expectation that their income and circumstances will not affect their ability to keep up payments. Life sometimes has other ideas. You may lose your job, or a relationship ends, and you are forced to sell your property. If you are not buying another property, have to sell quickly or you are unable to take your existing mortgage product with you, then you may have to pay an early repayment charge.

Your new home purchase has been delayed

House buying can be a long process. You may have sold your existing property before you can buy your new home, and you have to repay your existing mortgage loan before a new mortgage deal starts. In that case your lender could charge an early repayment fee. However, they are likely to give you a refund when you move into your new home, as long as it does not take too long to complete.

When might you choose to pay an early repayment charge?

There might be occasions when you decide that paying the mortgage early repayment charge will save you money, or makes more financial sense. Such as:

• If the interest rate on your new deal is so much lower than your current mortgage product, that even though you will have to pay an early repayment charge, you will still be saving money in the long term
• If you are able to repay your mortgage in full, then your redemption fee or early repayment charge is less than the total mortgage payments you would have paid for the period that remains on your mortgage deal

Is a redemption figure the same as a redemption fee?

No, a redemption figure is different to a redemption fee. A redemption figure is the full amount that you pay to pay off your mortgage in its entirety, including the outstanding loan, the early repayment charge and any other costs. Sellers are asked to provide a redemption figure by their  solicitors as part of the conveyancing process.

How much mortgage early repayment charge?

The fees payable will vary depending on the length of time remaining on the mortgage deal, and the balance of funds to be repaid. They are normally calculated as 1-5% of the redemption figure, but will be less the further you are into your deal.

For example, you will be paying a significantly higher repayment charge if you are only one year into a five-year deal, and have £200,000 to repay, than if you have six months left of a ten-year mortgage deal with only £20,000 to repay.

Each mortgage provider will calculate their early repayment charges differently.

Every year your lender should provide you with a statement that includes the latest early repayment charges. If you are unsure how much your early repayment charge is, check with your lender. 

How to avoid early repayment charges?

The best way to avoid early repayment charges is to wait until your current mortgage deal expires, when you will revert to paying the standard variable rate (SVR). Once you are not tied in to a mortgage deal early repayment charges do not apply. Some mortgages do not have early repayment charges, but these will usually be SVR or tracker mortgages, where interest rates will be higher.

Contact your local haart branch 

If you are thinking of buying and looking for a valuation on your property, get in touch with your local haart branch today.