Early Repayment
There may be instances where you are lucky enough to be able to overpay your mortgage or even pay it off completely. You may receive a large windfall through inheritance, a sizable bonus from your job or you may even have bought a lucky lottery ticket. Whatever the reason, you may decide it is time to reduce or pay off probably one of the largest financial commitments in your lifetime; your mortgage.
What is Early Repayment?
Early repayment (otherwise known as early settlement or early redemption) is when you pay off all or part of the mortgage earlier than anticipated.
If the mortgage is repaid in full, the lender will remove their legal charge and therefore their interest in the property. They will then return the property deeds to you. Most lenders will offer a deed holding service where they will look after the deeds for you if you do not have a safe and secure area to store them, although you don't have to use them as there are numerous deed storage services to choose from. The lender may charge an annual fee for this service although there are some lenders that will provide this for free providing the mortgage balance is kept at a nominal figure (usually between £1 and £100).
One of the most important things to do when either paying off the mortgage in part or in full is to check whether the lender charges an early redemption charge [ERC]. Generally speaking, variable rate mortgage products do not have ERCs whilst fixed, discounted and capped rate mortgage products. It is wise to check your mortgage offer or contact your lender before making any payments as you may be charged a fee for doing so.
Most lenders will permit you to make a certain amount of overpayments per year without incurring an ERC. This is usually expressed as either a percentage of the mortgage or as a fixed amount and providing you do not exceed this limit, no ERC will be payable.
e.g. Consider a mortgage of £250,000 that allows 10% overpayments per year and carries a 3% ERC. If you make a payment of £25,000, you will not be charged an ERC as you will be within the £25,000 limit permissible. If you were to then make another overpayment of £25,000, an ERC of £750 (£25,000 x 3%) will apply.
Advice regarding Early Repayment
- You should always check whether there is an ERC applicable before making any overpayments
- If an ERC does apply, consider paying off the mortgage in stages (i.e. if the maximum overpayment permitted without charges was 10%, you could pay 10% one year then another 10% the following year, etc.)
- Weigh up the cost of the ERC compared to the interest repayments you will be paying over the remaining term of the mortgage product. Ensure that it makes financial sense to pay the charge and redeem the mortgage early
Summary
- Early repayment occurs when all or part of the mortgage is repaid sooner than expected
- A potential drawback is that you may be charged a fee to repay the mortgage early - check with your lender whether an early redemption charge is applicable and what the amount would be
For more information about 'Mortgage Early Repayment', you can call us on 020 8783 1337 or submit an online quote.
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