Should You Remortgage with Early Repayment Charges?

If you have a mortgage, you may be faced with the conundrum of whether to remortgage with early repayment charges. There is always a clear-cut answer in situations with early repayment charges, it can be a little tricky getting to the right solution though.

This article looks at early repayment charges and how you can work out whether to remortgage 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 charge applied by the lender if you repay your mortgage early. This can be a partial or full repayment of the mortgage.

If you are looking to remortgage, the new lender will redeem your old mortgage and create a new mortgage product with themselves instead. This means if you are switching lenders, you will always be paying off one mortgage product and taking a new product with the new lender.

If you are using the same lender, there may be some leniency around early repayment charges, and it is best to discuss whether an early repayment charge applies with the lender before deciding a course of action. In most cases, even when using the same lender, an early repayment charge will still apply if there is one on your mortgage product.

When Might an Early Repayment Charge Apply?

There are three main actions that will cause an early repayment charge to trigger:

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

An early repayment charge will normally have criteria attached to it. It is common for lenders to put both value and time limits on an early repayment charge. For example, some lenders allow you to make overpayments up to a certain threshold before an early repayment charge applies. This is typically 10% of the sum outstanding per annum.

Most early repayment charges will only apply for the duration of your mortgage deal. For example, if you are fixed into a deal for 5 years, the early repayment charge will likely be in force for a 5-year period.

You may find that your early repayment charge is fixed for the entire period or decreases over time. For example, some lenders have staggered early repayment charges where the charge is higher in the early years and reduced toward the end of the deal.

Should I Remortgage Early?

The calculation for deciding whether to remortgage early is fairly simple. First you must calculate how much you will save each month by remortgaging early. For example, if you have exactly 3 years left on your mortgage deal and switching saves you £200 a month – your total saving will be £7,200.

Once you have calculated your saving, you should look at how much the early repayment charge is. For example, a lender may have a fixed early repayment charge of £10,000 over the term you have the deal. In this example, it is beneficial to continue with your existing mortgage product as the saving isn’t offset by the charge you must pay to the lender. In simple terms, you need to calculate your saving and your early repayment charge then work out which option costs you more.

If there are exceptional circumstances that mean you must remortgage, or your situation would be improved by remortgaging – it might be acceptable to pay an early repayment charge that is greater than a potential saving. For example, if you have anti-social neighbours and want to move home, it might be worth paying the penalty to exit your current mortgage deal early rather than spend years tolerating poor conduct from neighbours.

Can I Get a Mortgage Without an Early Repayment Charge?

Personal factors affect a mortgage rate, such as the amount you wish to borrow, the amount of deposit you can put down and your credit score.

Yes, there are mortgage products available with no early repayment charges. A whole of market mortgage broker will be able to look at your needs and direct you to a product without an early repayment charge.

Although mortgage products exist without early repayment charges, you should be aware this isn’t the norm. Most lenders apply early repayment charges. The reason why a lender applies an early repayment charge is because they calculate a specific profit in return for offering your original mortgage deal.

If you exit without penalty, the lender will not make the desired profit they need to offer that product. Most competitive mortgage products will have 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 the product term. For example, if you have a product with an early repayment charge for 5 years, waiting until the 5 years has elapsed will avoid the early repayment charge.

If you contact a reputable mortgage broker, they should arrange a mortgage offer six months before the product expiry date. As mortgage offers are typically valid for six months, a broker and solicitor can arrange for the new mortgage to start on the date that your existing mortgage product expires.

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

• Contact the lender and ask if they will extend any kind of goodwill gesture to reduce the early repayment charge. Lenders rarely do this but it is not unheard of, so it is worth a try.
• Speak to a whole of market mortgage broker and ask them to find a product that saves you enough money to offset the cost of the early repayment charge. This is likely to be a more practical solution than relying on a lender to waive or reduce an early repayment charge.
  

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 want to remortgage an existing mortgage with early repayment charges, contact Boon Brokers today. We can advise you further and give you a specific recommendation for your circumstances.