Early Repayment Charges (ERC's)

If you have a mortgage that benefits from a fixed rate or a discount off the standard variable rate then it is highly likely that it will come with an early repayment charge payable if you pay off some or all of the mortgage before a certain date. For example, a 5 year fixed rate is likely to have an ERC if you repay some or all of the mortgage in the first 5 years (i.e. while the rate is fixed).

ERC's are not payable if the repayment is authorised, for instance as part of your normal repayments for a capital & interest mortgage (repayment mortgage). Also, many lenders allow you to reapy a ceratin amount of your mortgage with incurring an ERC; usually 10% of the mortgage balance each year or a fixed amount, for example £500 per month.

ERC's come in a number of guises. They may be a percentage of the amount paid; for example a 5% ERC would result in a penalty of £500 if you repaid £5,000 over and above the amount you are allowed to overpay. Some penalties are on a sliding scale; for example, they may be 5% in the first year, 4% in year 2, 3% in year 3, 2% in year 4, 1% in year 5 then nothing thereafter.

Most people do not mind there being an ERC for a specific period providing that period does not exceed the beneficial rate period (initial period), i.e. if the mortgage is fixed for 5 years then the ERC is acceptable if it does not apply when the fixed rate comes to an end after 5 years - we refer to this as 'no overhang'. Be careful of mortgages with ERC's that extend beyond the initial period, i.e. they continue after a fixed rate comes to an end - we refer to this as 'overhang'.

Mortgages with an 'overhang' may appear to be very cheap as they usually come with really low initial rate. It is at the end of the initial period that you will end up paying more than but you will not be able to move your mortgage unless you pay the early repayment charge.

There are other costs incurred when you move youe mortgage. These may be referred to administrative fees or deeds discharge fees. This fee is to cover the lenders expenses in clsoing your mortgage account and in the past have been as high as £395. More recently, as result of customer complaints, these fees have reduced and are more likely to fall somewhere between £50-£150.

To understand what fees apply to your mortgage look at section 10 of the quotation provided to you by the lender or mortgage broker, this is often referred to as a Key Facts Document.

When working out whether or not it is beneficial to move your mortgage to another lender, don't forget to include the copsts of closing your mortgage account with your current lender.