ERC’s | Early Repayment Charges

The In’s and Outs of Early Repayment Charges

IMG_3958

Reading Time: 2 mins

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

For example:

Property Value: £175,000

Mortgage: £144,075

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.

IMG_3961.jpg

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.

Interest Rates: Fixed vs. Variable

Save £5,000 a year by regularly switching Mortgage provider

IMG_3871.jpg

Reading Time: 3 mins

So you have a fixed rate mortgage, it’s due to expire, however you don’t have time nor do you see the need to tamper with it.

A fixed interest rate can last for 2,3,5 or 10 years.

What this means is that for however many years the rate you are currently on is fixed for, your monthly payments will remain the same. Once your fixed term has expired, your mortgage switches to something called the variable rate.

The variable rate tends to be 1.5-2.5% higher than the fixed rate and is provided to you on your KFI/Mortgage Illustration document.

For example:

Value of the property
£480,000

Mortgage Balance
£361,935

Current rate with “X” Bank:
A 5 year fixed rate of 1.89% until 31/09/2023

Variable Rate:
4.24% thereafter

Your current monthly mortgage payment is £378.45

Your monthly mortgage payment on the variable rate once your fixed rate has expired is £848.89

That’s £470.44 more per month. That’s double your usual Monthly mortgage payment and then some…

Across 12 months, that’s an extra £5,645.28. By switching Mortgage Provider or going on to a new product with your current mortgage provider, you’d save yourself £5,645.28.

Of course not everyone will save £5,645.28 due to variable payments and Mortgage balances varying per Mortgage Provider. After-all everyones circumstance is different, however one thing you’ll all have in common is the amount of money you could save by switching mortgage products and not staying on the variable rate.

Can I switch rates earlier (every 6 months) and save more money by going on to a lower interest rate elsewhere?

No. If you could, lenders wouldn’t benefit. You are locked in to the rate for 2,3,5 or 10 years. If you break the contract before the rate expires, you will be obliged to pay an ERC – Early Repayment Charge.

ERC’s – another post, another day Due 24th September