Should You Remortgage with Early Repayment Charges?

If you have a mortgage, you may be faced with the dilemma of whether to remortgage when early repayment charges apply. While there is often a clear answer in situations involving early repayment charges, reaching the right decision can sometimes be tricky.

This article looks at early repayment charges and explains how you can work out whether it is worth remortgaging early if you have one.

Let’s get to the bottom of this.

What is an Early Repayment Charge?

An early repayment charge is a fee applied by a lender if you repay your mortgage early. This can apply whether you make a partial repayment or repay the mortgage in full.

If you are looking to remortgage, the new lender will redeem your existing mortgage and set up a new mortgage product in their name. This means that when you switch lenders, you are effectively paying off one mortgage and taking out a new one.

If you stay with the same lender, there may be some flexibility around early repayment charges. However, it is best to confirm this directly with your lender before making a decision. In most cases, even when remaining with the same lender, an early repayment charge will still apply if it is written into your mortgage product.

When Might an Early Repayment Charge Apply?

There are three main actions that can trigger an early repayment charge:

• Making a large overpayment on your mortgage
• Paying off your mortgage in full
• Remortgaging onto a new product

An early repayment charge will usually have specific criteria attached. It is common for lenders to set both value and time limits. For example, some lenders allow overpayments up to a certain threshold before a charge applies. This is typically up to 10% of the outstanding balance per year.

Most early repayment charges only apply for the duration of your mortgage deal. For instance, if you are on a five-year fixed-rate deal, the charge will usually apply for the full five-year term.

You may also find that your early repayment charge is either fixed for the entire period or reduces over time. Some lenders use a staggered structure, where the charge is higher in the early years and decreases towards the end of the deal.

Should I Remortgage Early?

The calculation for deciding whether to remortgage early is fairly simple. First, you need to work out how much you would save each month by switching. For example, if you have exactly three years left on your mortgage deal and remortgaging saves you £200 per month, your total saving would be £7,200.

Once you have calculated your potential savings, you should compare this with the early repayment charge. For example, a lender may have a fixed early repayment charge of £10,000 for the remainder of your deal. In this scenario, it would be better to stay with your existing mortgage, as the savings do not outweigh the penalty you would have to pay. In simple terms, calculate your savings and compare them with the early repayment charge to see which option costs you more.

If there are exceptional circumstances where remortgaging would significantly improve your situation, it may still be worth paying an early repayment charge even if it exceeds your potential savings. For example, if you have anti-social neighbours and want to move home, it might be worth paying the penalty to exit your mortgage early rather than spending years dealing with an unpleasant living situation.

Can I Get a Mortgage Without an Early Repayment Charge?

Personal factors affect your mortgage rate, such as the amount you want to borrow, the size of your deposit, and your credit score.

Yes, there are mortgage products available with no early repayment charges. A whole-of-market mortgage broker can assess your needs and direct you to a suitable product without an early repayment charge.

However, you should be aware that mortgages without early repayment charges are not the norm. Most lenders apply these charges because they calculate a specific level of profit in return for offering your original mortgage deal.

If you exit the mortgage without penalty, the lender will not achieve the expected profit required to offer that product. As a result, most competitive mortgage deals include exit penalties in the form of early repayment charges.

How Can I Avoid Paying an Early Repayment Charge When Remortgaging?

The easiest way to avoid an early repayment charge is to wait until the end of your product term. For example, if your mortgage has a five-year early repayment charge period, waiting until the five years have passed will allow you to remortgage without penalty.

If you contact a reputable mortgage broker, they should arrange a mortgage offer around six months before your product expiry date. As mortgage offers are typically valid for six months, your broker and solicitor can coordinate the new mortgage to start on the exact date your current deal ends.

If you can’t wait for the early repayment charge period to pass, you can try the following:

• Contact your lender and ask whether they will offer any goodwill gesture to reduce the early repayment charge. Lenders rarely do this, but it is not unheard of, so it is worth asking.
• Speak to a whole-of-market mortgage broker and ask them to find a deal that saves you enough money to offset the cost of the early repayment charge. This is usually more practical than relying on the lender to reduce or waive the fee.

Boon Brokers is a UK-based whole-of-market mortgage, insurance, and equity release brokerage. We offer FREE, no-obligation advice and will search the market to find you the best remortgage deal.

If you are considering remortgaging and have early repayment charges, contact Boon Brokers today. We can provide tailored advice and a specific recommendation based on your circumstances.