Video: What's An Early Repayment Penalty And How To Avoid One - Estate Agents in Derby

In this week’s video, Ben and Joe talk about early repayment charges and what to do if you’re in the middle of a fixed rate term and you’re not sure whether you can afford to move or not…

*** To arrange a chat with one of our own friendly, expert mortgage advisers complete the short form here – hannells.co.uk/speak-to-an-adviser ***

Ben: Hi, it’s Ben from Hannells and I’m back again here with Joe, one of our expert in-house mortgage advisers, and in this video we’re talking mortgage early repayment charges.

So, Joe can you give us a bit of a summary as to what an early repayment charge actually is when it comes to mortgages?

Joe: Yeah so an early repayment charge is, it’s basically a charge if you pay your mortgage up early. They’re usually for a fixed rate mortgage so if you’re in a five-year fixed rate, for example, you’ll have a charge if you pay your mortgage off early in that time, in that first five years that time period there.

Now, the way they’re calculated is it’s usually a percentage of your mortgage. So, for example, in that scenario – five year fixed rate – the first year of your mortgage, if you pay it off or clear your mortgage it’s five percent of your mortgage balance. So, in that first year if your mortgage balance is £100,000 you pay an extra £5,000 which is five percent to clear. And that’s your penalty for doing that.

Ben: Yeah that’s interesting because if I lend anybody money – if I’m just putting myself in the headspace of a of a lender – it seems common sense that the sooner they pay me back the better because I’ve got all the money back in my account. So, why, from a mortgage lender’s perspective, do they have these charges for paying your mortgage off quicker than the terms that they’ve agreed with you?

Joe: So, a mortgage lender has these early repayment charges because, you know, if they’re lending you money they want to be making the interest that’s how they make their money – is on their interest rate. So, if you’re clear it off early they’re potentially losing out on some money that’s why they have an early repayment charge.

Ben: So, what’s the situation then if I’m in the middle of a fixed term and I want to think about moving?

Joe: So, if you’re in the middle of your fixed rate term and wanting to move house there is a way around it. Now most mortgage companies let you do a thing called “porting” which is basically where you pick the mortgage up that you have take it to a new property. If the new property is more expensive than the old one, you will have to apply for some additional funds which will be on a different interest rate.

In this market at the moment if your interest rate’s a lot lower and you’ve got a few years left to go it’s probably worth doing the mortgage port. Now a couple of things are needed in this. You need to make sure that you can borrow enough to buy the house that you’re looking at buying. You also need to make sure that the mortgage lender can lend against the type of property that you’re looking to buy. But yeah, you can definitely move over and get around paying that early repayment charge.

It’s always best to speak to someone about that because, for me for example, I’ve got a calculator that works out what your early repayment charge would be and if it’s more beneficial to completely move and pay the early repayment charge or port your mortgage. We have a look at both scenarios.

Ben: OK, so it’s good to know there’s options but again if I’m in the middle of this fixed term how do I actually find out what my penalty is going to be for paying off the mortgage earlier?

Joe: So, it will be on your mortgage illustration that you’ll get from the mortgage lender. Now if you’re like me and it’s in that drawer with all your important documents where you never find anything again, most mortgage lenders will have an online system that you can log in and actually find out what your up-to-date mortgage balance is, when your fixed rate term ends and also what your early repayment charge is as well.

Ben: So let’s say it’s my lucky week and somehow I’ve come into some money, I’m thinking “right I’m going to put this towards paying off my mortgage” what should I do to find out whether that’s the right thing for me or not?

Joe: When you’re in a fixed rate you can pay up to 10% of your mortgage balance off each year.

So if your mortgage balance is £100,000 you can pay an extra £10,000 towards your mortgage balance without being penalised. So you can either do bits like that or you can wait till the fixed rate ends and pay the chunk off without being penalised with an early repayment charge.

Ben: OK, thanks Joe. So if you’re in a fixed term mortgage and you want to move but you’re not sure whether you can, the best thing to do as always is come and speak to us at Hannells. Have a chat with Joe or one of our other in-house expert mortgage advisers and they’ll be able to give you the best advice and point you in the right direction and for anything else property or mortgage related if you’ve got any questions stick them in the comments below, send us a message or you can reach us at hannells.co.uk.

So, Joe as always thank you for joining us and sharing your mortgage expertise, thanks for watching and we’ll see you on the next one!

If you have any questions or concerns about mortgages or property, or maybe you’ve got a suggestion for a topic you’d like us to cover in a future episode, please get in touch with us at Hannells at enquiries@hannells.co.uk.

And if you’d like to arrange a chat with one of our expert, in-house mortgage advisers just complete the short form >>HERE<<

To catch all of our latest content, make sure you subscribe to our social media channels below!