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Mortgage lenders lose money if borrowers reduce the funds that interest can be charged on. So when you are buying a house and take out a mortgage product with a promotional interest rate attached, lenders will want to ensure that you do not break the terms of the mortgage deal. They do this by making an early repayment charge one of the conditions of the mortgage.
Early repayment charges are fees you might be asked to pay by your mortgage lender in certain circumstances. Homeowners incur early repayment charges if they want to repay their mortgage in full, reduce the amount they have borrowed or move to another mortgage product or to a different lender while still ‘tied in’ to an existing mortgage deal.
If you are tied in to a mortgage product, usually on a discounted interest rate, early repayment charges will apply for the duration of that discounted term. You will have to pay an early repayment charge if you decide to remortgage your property or move to a different lender before the end of any promotional term.
For example, you may have chosen a fixed or capped interest rate product for a five year period. If you repay the mortgage in full during this period you will have to pay an early repayment charge.
Moving home does not necessarily mean you have to pay repayment charges. You can usually transfer your existing mortgage deal to your new property. However, if you are buying a house that costs less than your current property, you might want to reduce the size of your existing loan. Overpaying a lump sum of your mortgage will incur an early repayment charge.
When people take out mortgage products it comes with the expectation that their income and circumstances will not affect their ability to keep up payments. Life sometimes has other ideas. You may lose your job, or a relationship ends, and you are forced to sell your property. If you are not buying another property, or you are unable to take your existing mortgage product with you, then you may have to pay early repayment fees.
House buying can be a long process. You may have sold your existing property before you can buy your new home, and you have to repay your existing mortgage loan before a new mortgage deal starts. In that case your lender could charge an early repayment fee. However, they are likely to give you a refund when you move into your new home, as long as it does not take too long to complete.
The fees payable will vary depending on the length of time remaining on the mortgage deal, and the balance of funds to be repaid. They are normally calculated as 1-5% of the redemption figure, but will be less the further you are into your deal.
For example, you will be paying a significantly higher repayment charge if you are only one year into a five-year deal, and have £200,000 to repay, than if you have six months left of a ten-year mortgage deal with only £20,000 to repay.
The best way to avoid early repayment charges is to wait until your current mortgage deal expires, when you will revert to paying the standard variable rate (SVR). Some mortgages do not have early repayment charges, but these will usually be SVR or tracker mortgages, where interest rates will be higher.