Paying off your mortgage early can be costly. Learn more about early payment on a mortgage.
What is an early payment charge?
An early repayment charge is a fee you might have to pay your lender if you want to end your mortgage deal before the ‘official’ deal term ends. For instance, you have a three-year fixed rate deal with your lender but you want to move to a lower fixed rate at the end of 12 months. If you were to switch away your lender would charge an early repayment penalty fee.
Early repayment penalty charges can also be applied if you want to pay off a chunk of your mortgage to reduce your overall borrowing.
Lenders charge early repayment fees because they are expecting to make a certain amount of interest by lending to you on a fixed rate deal, so paying off your mortgage earlier means they have lost money so they are passing on this charge to you. Full payment is entertained after most times 3 years.
When might early repayment charges be applied?
There are a number of cases where you might find yourself facing mortgage early repayment charges. These include:
- When you re-mortgage too early. If you switch to a new mortgage before the end of your current deal, it will come with heavy fees. Even if you make the change just one day too early. Make sure to double-check the exact date your mortgage deal contract ends.
- When you move to a cheaper property. When you move home, you can usually transfer your existing mortgage deal, but what if your new place is cheaper? You will want to use the extra cash from selling your old property to reduce the size of your mortgage, but if you are still tied into a deal, early repayment charges could apply.
How much do early repayment charges cost?
Early repayment charges aren’t usually a flat rate fee. The cost will usually depend on how much you have borrowed (the size of your mortgage) and how far you are into your deal.
Early repayment charges are usually calculated as a percentage of the amount still outstanding on your mortgage. The typical amount is usually between 1% and 5%. Often, the cost depends on how far you are into your deal so on a 5-year fixed rate deal. For instance, you will be charged 5% if you leave in your first year, 4% in your second, 3% in the third year, and so on.
Is there any way to avoid mortgage repayment charges?
There are some mortgages that don’t come with early repayment charges, so signing up for one of those will mean that you can avoid paying any extra fees if you decide to break your mortgage. Keep in mind, though, that these are almost always standard variable rate or tracker mortgages, and the interest is usually much higher than you did get on other deals.
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