Remortgage with an early repayment charge

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.

What is an early remortgage?

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.

What exactly is an early repayment charge on a remortgage?

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.

When might an early repayment charge be applied?

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.

What is a fixed-rate mortgage?

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.

What are the pros and cons of remortgaging with an early repayment charge?

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.

Why might I decide to remortgage early?

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:

1. Lower Interest Rates: If interest rates have fallen significantly since you took out your mortgage, or if your credit rating has improved, you may be able to secure a new mortgage with a much lower rate. Even taking into account an early repayment charge, you could end up saving money over the term of your mortgage.
2. Change in Financial Circumstances: If your financial situation has changed—for instance, if you’ve had a pay rise or received an inheritance—you might decide to remortgage to a product that lets you make overpayments and potentially pay off your mortgage faster.
3. End of Fixed Rate Period: If your fixed rate period is coming to an end, you might choose to remortgage early to secure a new fixed rate and avoid moving onto your lender’s standard variable rate, which can often be higher.
4. Changing Mortgage Type: You might want to switch from an interest-only to a repayment mortgage, or vice versa, depending on your financial situation and goals.
5. Release Equity: If your home has significantly increased in value, you might choose to remortgage to release some of this equity, which could be used for home improvements, to consolidate other debts, or to help your children onto the property ladder.
6. Better Mortgage Terms: If you’re unhappy with the terms of your current mortgage—for example, if it lacks flexibility or if your lender’s service has been poor—you might decide to remortgage early with a new lender.

How much does it cost to leave a mortgage early?

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:

1. As mentioned earlier, If you’re still within the initial fixed, tracker or discount period of your mortgage, you may have to pay an ERC for leaving early. This can be a percentage of the outstanding mortgage balance, often on a sliding scale reducing over the period. For instance, you might pay 5% of the balance if you leave in the first year, 4% in the second year, and so on.
2. Some lenders might charge a mortgage exit fee, also known as a deeds release fee or a final repayment charge when you pay off your mortgage in full. The amount can vary, but it’s typically between £50 and £200.

3. If you’re leaving your mortgage early to remortgage with a different lender, you also need to take into account the costs associated with setting up a new mortgage. These could include arrangement fees for the new mortgage, valuation fees, legal fees, and potentially broker fees.

Can I get an early repayment charge refund?

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.

Can I remortgage if I’m not on a fixed term?

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:

1. Secure a Lower Rate: If interest rates have fallen or your credit rating has improved since you took out your current mortgage, you might be able to secure a lower interest rate by remortgaging.
2. Fix Your Rate: If you’re concerned that interest rates might rise in the future, you could remortgage to a fixed-rate mortgage to secure a certain rate for a set period of time.
3. Change Your Mortgage Type: You might want to change from an interest-only to a repayment mortgage, or vice versa, depending on your circumstances and financial goals.
4. Release Equity: If your home has increased in value, you might want to remortgage to release some of this equity for home improvements, to consolidate debts, or for other purposes.

Is there any way to avoid an early repayment charge?

Yes, there are several ways you might be able to avoid an Early Repayment Charge (ERC):

1. Wait it Out: The most straightforward way to avoid an ERC is to wait until your initial mortgage period (usually the fixed, tracker, or discounted term) ends. At this point, you’re usually free to remortgage or make overpayments without incurring an ERC.
2. Stay Within Overpayment Limit: Most mortgage agreements allow you to overpay a certain amount each year without incurring an ERC. This is often up to 10% of the outstanding balance, but the exact amount will depend on your mortgage terms.
3. Porting: 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.
4. Special Circumstances: Some lenders may waive the ERC in certain circumstances, like a death, divorce, or redundancy. However, this is at the lender’s discretion and is not guaranteed.

Are you able to borrow the amount you need from a remortgage?

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.

Why is equity and loan-to-value so important for a remortgage?

Equity and Loan-to-Value (LTV) are crucial factors when considering a remortgage for several reasons:

1. LTV is one of the primary ways lenders assess risk. The more equity you have in your property (i.e., the lower your LTV), the less risky the loan is for the lender. If you were unable to make your repayments, the lender would have a better chance of recouping their money if they had to repossess and sell the property.

2. Lenders typically offer more favourable interest rates to borrowers with a lower LTV because of the lower risk associated with the loan. So, the more equity you have, the more likely you are to secure a lower interest rate, which can lead to significant savings over the term of your mortgage.

3. The amount of equity you have in your home can also influence how much additional money you could potentially borrow when remortgaging. If your property’s value has increased significantly, you may have more equity in your home, which could allow you to borrow more, assuming you can afford the repayments.

4. If your LTV is over 100%, you’re in negative equity, meaning you owe more on your mortgage than your property is worth. This situation can make remortgaging difficult. Lenders might be reluctant to offer you a new mortgage, and you’re likely to be stuck on your current lender’s Standard Variable Rate (SVR), which can be higher than other available rates.

How is the early repayment charge calculated for remortgages?

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.

Will I still be charged an early repayment charge if I overpay on my mortgage?

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.

How can I calculate how much equity I have?

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.

Factors to consider before remortgaging early

Remortgaging early can be a big decision, and there are several factors that you should consider before you proceed. Here are a few:

1. Check your mortgage agreement to find out whether you’ll have to pay an ERC and, if so, how much it would be. The charge can be substantial, often a percentage of the outstanding mortgage balance.

2. Setting up a new mortgage can come with costs such as arrangement fees, valuation fees, and legal fees. Additionally, there could be broker fees if you’re using a mortgage broker.

3. If interest rates have fallen significantly since you took out your current mortgage, you may be able to secure a lower rate by remortgaging. However, if rates are similar or higher, remortgaging might not save you money.

4. If your financial situation has changed—for instance, if you’ve had a pay rise or received an inheritance—you might be able to afford higher repayments and could consider remortgaging to a product that lets you pay off your mortgage faster. Conversely, if your income has reduced, it might be harder to get a good deal on a remortgage.

5. The benefits of remortgaging could be more substantial if you have a larger amount or a longer term left on your mortgage. If you’re close to paying off your mortgage, the savings from a lower rate might not outweigh the costs.

6. If your property’s value has increased significantly, you may have more equity in your home and could be eligible for lower rates. On the other hand, if your property’s value has fallen, you could be in negative equity (owing more than your property is worth), which could make remortgaging difficult.

7. Check your credit score before remortgaging. If your credit score has improved since taking out your mortgage, you might be able to get a better rate by remortgaging. However, if your credit score has worsened, it might be harder to find a good deal.

Specialist advice for early remortgages

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:

1. One of the first things a mortgage adviser will look at is whether an Early Repayment Charge (ERC) applies and how much it is. This can help determine whether remortgaging early makes financial sense.
2. An adviser can help calculate whether the potential savings from a lower interest rate will outweigh the costs of remortgaging (including any ERC, as well as legal fees, valuation fees, and product fees for the new mortgage).
3. A mortgage adviser can also help assess whether you will be able to afford the repayments on a new mortgage, taking into account your income, outgoings, and any changes to your circumstances that might be expected in the future.
4. Some mortgage deals are only available through brokers. An adviser can access a wide range of products and lenders, potentially giving you access to better deals than you might find on your own.
5. Remortgaging can be a complex process, especially if you’re looking to do it early. An adviser can guide you through the process, helping with paperwork and liaising with the lender on your behalf.
6. Financial advisers and mortgage brokers are regulated by the Financial Conduct Authority (FCA) in the UK, which means you have certain protections and can complain to the Financial Ombudsman Service if things go wrong.

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.