The In’s and Outs of Early Repayment Charges
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Last week we spoke about fixed vs variable interest rates.
You can save money by changing your Mortgage provider regularly when your current rate/product expires.
Unfortunately you cannot switch Mortgage providers or rates whilst still locked in to a product. If you decide to sell your property/switch product regardless of your rate not yet expiring, you will be subject to something called an early repayment charge.
Early repayment charges are worked out in percentages and are outlined in your Mortgage Illustration/KFI
Property Value: £175,000
Product: 1.74% 2 year fixed rate
Expiry date: 30/04/2020
Your document will say: You have the right to repay this loan early, either fully or partially.
BASIS OF CHARGE
2.00% of the amount repaid on or before 30/04/2019
1.00% of the amount repaid on or before 30/04/2020
The maximum early repayment charge you will pay is £2,876.44. Should you decide to repay this loan early, please contact us to ascertain the exact level of the early repayment charge at that moment.
The above is self explanatory, if you do decide to remortgage and break/cut your product short, be prepared to pay the extra few thousands in ERC’s.
Remember the ERC of every Mortgage will not be £2,876.44 as above, the ERC is worked out based on your current Mortgage balance and the remaining term of your Mortgage. A slightly higher loan amount on a longer fixed rate product will have a higher ERC descending accordingly year by year like the above.
When you sell your property the same applies. When you sell a property, the funds you receive for your property cover the Mortgage balance and the excess is yours for the taking.
If you complete on the sale of your property whilst locked in to a fixed term product, you will be subject to early repayment charges.
This is why when people desire to sell their property within the next year or so and their remortgage is due, they tend to go for a product that is not fixed and does not contain ERC’s or they stay on the variable rate. This allows rooms for flexibility, however a down side to this is that their monthly repayments may be slightly higher than they would be if they were to be on a fixed term product containing ERC’s.