Susan Kelly
Dec 22, 2023
Congratulations on your success if you have the good fortune to be able to pay off your mortgage earlier or have found a better rate to switch to. However, before you cancel your existing mortgage and go on to a new one, you should determine whether or not you will be subject to an early repayment charge. This charge has the potential to nullify whatever financial gains you may have earned as a result of switching lenders or prepaying your loan.
There will inevitably be moments in your life when you will be forced to back out of a mortgage agreement. You may have to relocate because you and your spouse have decided to go their separate ways. Before making any significant choices, it is essential to understand how early repayment costs operate and the amount of money it will cost you to get out of your arrangement.
If your mortgage offer includes early repayment penalty, it will typically become effective during tie-in term if any of the following conditions are met:
Mortgage early repayment penalties are a fee assessed by the lender and paid by the borrower if the borrower pays off their loan sooner than expected. The charge enables lenders to recoup the expenses and interest that they would have otherwise received during the duration of the transaction that is being terminated early.
When you take out a loan, the lender's purpose is to earn a profit off of the interest you pay. This helps to ensure that they will be in their pocket as a result. Although this may not be of much solace to the borrower, the first interest rate provided is contingent on your continued participation in the transaction for a certain amount of time.
If you pay off your mortgage loan early, the typical penalty ranges from 1 percent to 5 percent of the total amount still owed on loan. This may be structured in stages, beginning with a greater proportion early in the transaction and decreasing as it draws closer to the deal's conclusion, depending on the lender. Waiting until you move up to the next tier will result in reduced costs for you, as this indicates.
One example is as follows: Let's say you are now in the second year of a fixed-rate agreement for five years and wish to move to a cheaper rate with another lender. If you still owe £120,000 on your mortgage and there is a 3% charge, you will be responsible for paying $3,600. If the charge is reduced to 1% of the loan in the fourth year, you will be responsible for paying $1,200. Therefore, the early repayment charge will decrease the longer you wait before making the payment.
You should be aware that if you are moving to a different rate with your existing lender, the lender may waive early repayment charge if you are getting close to the conclusion of your current agreement. This is something to keep in mind if you are only switching rates.
The most effective strategy for avoiding early repayment charge is to understand the terms of your agreement thoroughly and to avoid those terms consistently. The following are some potential alternatives: