Early Redemption Charge

Early redemption charges (otherwise known as early repayment charges or early settlement fees) are common amongst mortgage products, particularly ones offering a low rate of interest. Early redemption occurs when you repay either the full amount or part of the mortgage before an agreed time.

What is an Early Redemption Charge?

An early redemption charge [ERC] is a fee imposed by the lender if the borrower settles the mortgage before the term agreed. You may be wondering why lenders charge a fee for repaying a mortgage early as this should be a good thing considering you are reducing your debt and therefore their exposure. The reason for this is because a lender may offer a considerable discount off of the mortgage interest rate and in exchange for this discount may require that you commit to paying the mortgage for a certain period of time.

This will allow the lender to recover their costs via the monthly repayments you make but will also make it harder to transfer the mortgage to another lender within this same time period.

In order to ensure you commit to the mortgage for a period of time, the lender will impose an Early Redemption Charge which allows the lender to collect a fee to recover the money they would lose out on in terms of future payments.

Early settlement fees are expressed as either a percentage of the mortgage or as a flat amount. For example, you may see an early repayment charge such as 3% for 3 years. This simply means that if you wanted to fully settle a £150,000 mortgage before 3 years, you would be charged a fee of £4,500 (£150,000 x 3%) to do so.

You may also see an ERC expressed in the form 5% / 4% / 3%. This is known as a stepped early repayment charge and means that the charge would be 5% for the first year, 4% for the second year and 3% for the third year.

Early repayment charge amounts and lengths can vary quite a lot between lenders and products so it is wise to check what this is before agreeing to the mortgage. Typically, the early repayment charge is the same length as the product term, i.e. a 3 year fixed rate would usually have an early repayment charge for 3 years. However, there are some mortgage products that have longer early repayment charges than the product term known as 'overhanging early repayment charges'. You may see a product such as a 2 year fixed rate with 3 year ERC. This means your rate will be fixed for the first two years and then on the lenders' standard variable rate for the third year.

An early redemption charge does not only apply when you repay the mortgage in full, it can also apply if you make a partial repayment (or overpayment). Most lenders and mortgage products will allow you to make a certain amount of overpayments without incurring an early repayment charge within a given year, however, if you were to overpay beyond this figure, you would pay the charge on the difference.

e.g. You have a £250,000 mortgage that allows overpayments totalling 10% per year (i.e. £25,000) and the mortgage has an early repayment charge of 3%. If you made overpayments totalling £50,000 in any one year, you would incur an early redemption charge of £750 (£50,000 - £25,000 x 3%).

Advice regarding Early Redemption Charges

• Consider the amount and length of early repayment charge and consider when you would be likely to review your mortgage. You should not for example go for a product that carries a 5-year ERC if you plan to remortgage or pay off a significant portion in 3 years. It is best to avoid longer ERC periods if possible although the product may have other features that could make it worthwhile
• If you plan to overpay the mortgage, check the amount of overpayments the lender will permit in any one year without charge and ensure this is sufficient to meet your requirements

Summary

• An early redemption charge is a fee imposed by the lender if the borrower settles the mortgage before the term agreed
• An early repayment charge is usually expressed as either a percentage or a fixed amount
• ERCs can vary a lot from lender to lender and product to product so read the terms of the mortgage carefully

For more information about 'Early Redemption Charges', you can call us on 020 8783 1337 or submit an online quote.