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What is an early redemption charge, and should I pay one?

What is an early redemption charge, and should I pay one?

August 16th, 2022

Can I remortgage early?

Whether you’re a mortgage holder facing a potential early redemption charge or a first-time buyer on the brink of a purchase, curious about the future, it’s crucial to be fully informed. Here’s everything you need to know about early redemption charges.

Many phrases and terms are associated with mortgages, and it can be overwhelming to stay on top of them, even for existing homeowners. This fact is especially true when there are multiple terms to describe the same thing, as is the case for an early redemption charge.

Also known as an early repayment charge, an early redemption charge (ERC) is a fee deducted from you by a lender when you overpay your mortgage beyond a certain level or pay it all off early. It’s an important factor to be aware of, as the charge can be thousands of pounds and so, alongside myriad potential exit and administration fees, could make a sizeable financial dent.

In the right circumstances, a case can be made for paying an early redemption charge on your mortgage. But there are also situations when it might not be the best choice. Read on and equip yourself with the information you need to know the difference.

When do early redemption charges apply?

There are a few different scenarios in which an ERC is likely:

  • Remortgaging too early – you could face an ERC if you remortgage too early. To avoid this, double check the exact date your mortgage deal ends, as making changes even one day earlier can incur charges.
  • Moving to a cheaper property – it’s normal to transfer your existing mortgage when you move, but if the home you’re moving into has a lower value and you’re reducing the size of your mortgage, an ERC could apply.
  • Unexpected sale of the home – if you run into financial difficulties and are selling your home without moving your mortgage over to another property, you’ll likely be charged for closing the mortgage in the middle of a contract.
  • Unexpected delays in the purchase process – if significant delays occur when you’re buying your new home, the lender will likely extend an ERC, but you should get a full or partial refund on this charge as long as the process doesn’t take more than a few months.

The cost of an early redemption charge

To determine what an ERC would cost you, you’ll need to look at your specific mortgage documentation, such as the original mortgage offer. It will usually be a percentage of the outstanding amount, typically between 1 and 5%. While 1% sounds insignificant, it can be a substantial figure when the outstanding balance is high. Imagine your outstanding balance was £250,000, for instance. 1% of that would still be a considerable £2,500.

Some ERCs will reduce the longer you’ve had your mortgage. This is often the case for larger high street lenders like Halifax, HSBC, Lloyds Bank, Nationwide and NatWest.

When you’re required to pay an ERC because you’re remortgaging, you might have a choice about whether you do it upfront or add it onto your new mortgage (but it’s worth bearing in mind that if you choose to add it on, you will then be required to pay interest on the amount).

Can you get a mortgage without an early redemption charge?

If you’re an independent professional who is finally ready to step onto the property ladder after years of saving, the thought of having to save any more money for unexpected charges is not fun. But it’s important to be prepared as extra fees, including ERCs, can always crop up.

You might be wondering if there are mortgage options that don’t include ERCs, and there are. But you’ll need to do your research before you go for an ERC-free deal. Most of these ERC-free mortgages are tracker mortgages or standard variable rate mortgages with higher interest rates.

If you’re a self-employed person already paying off their mortgage each month, the best thing you can do to escape any ERCs is wait until the end of your deal. For further advice on the subject, contact an expert broker.

Should you pay an early redemption charge on your mortgage?

Some people choose to pay off an ERC to achieve their financial/mortgage goals. It’s a choice that should definitely be taken on a case-by-case basis.

Here’s an example: Sally takes out a five-year fixed rate mortgage with a poor credit score and therefore she doesn’t qualify for a ‘prime’ mortgage rate. A couple of years later, Sally’s credit score has dramatically improved, thereby raising the possibility of remortgaging at this stage which would allow her to access a ‘prime’ rate. A switch could save Sally some money despite the ERC that would apply.

To figure out which mortgage best suits your situation, reach out today. You’ll receive top-quality specialist advice from our talented team in no time.

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