If you wish to reduce the amount you have borrowed from a lender, you may pay them an early repayment charge. This is a fee owed to your lender on account of reducing the overall amount owed. This will, in turn, allow you to end your deal before its ‘official’ term ends. Lenders charge early repayment fees as they are expecting to make a certain amount of interest by lending to you on a fixed or tracker rate deal. These payments will not generally be a flat fee, and normally depend on how much you’ve borrowed and how far you are into your deal.
It is important to note that early repayment charges do not usually apply if you are paying your lender’s standard variable rate (known as SVR) and want to switch away. You may be charged an admin fee to leave your lender, but typically this will be less than a few hundred pounds. In contrast, early repayment charges could run into the thousands. It is important to understand when you may be expected to pay early repayment charges so that you can financially prepare for them and factor them into your economic decisions.
Why Might You Have to Pay Early Repayment Charges?
There are a few reasons why you may need to pay early repayment charges, but they are most commonly associated with mortgage payments. For example, if you pay off a lump sum of your mortgage – something you may opt to do to reduce your overall borrowing – such fees may be applied to you. This is because a mortgage is a type of secured loan, meaning it is not backed up by any asset. A lender must ensure that they acquire what they had expected to make from lending you money – the debt you owe must be fairly paid off in full.
If you need to pay off other types of secured loans early, early repayment charges may also be applied. You may want to pay off a secured loan early because you wish to switch away from your lender before your term ends. For example, if 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, you may face these fees. The early repayment fee could be equivalent to 1-2 months’ interest, however, even with these fees, you might still save money on the overall interest accrued.
Paying off a secured loan early is a great option for some, but it’s not the best option for every secured loan borrower. You should always check the terms and conditions of your loan and figure out the true cost of the loan should you pay it back early compared to paying it back on the original loan repayment date.
Early Repayment Charges on Mortgages
Early repayment charges are most typically seen when it comes to dealings with your house and mortgage. There are several scenarios you may find yourself in as a home owner that may cause you to pay early repayment charges. As mentioned, you may simply wish to pay off a lump sum of your mortgage to reduce your overall borrowing, however, there are other circumstances where you may also feel you need to cut your mortgage off.
For example, if you are selling your house because of unforeseen circumstances such as a separation or need to move away, you may need to leave your mortgage deal so that you can proceed to sell your property fast. Similarly, if you hit financial difficulties, you might decide to sell your property. This may result in fees being applied if as you have been caused to cut off your deal with your lender earlier than expected.
Furthermore, if you move home and transfer your existing mortgage or a cheaper property, whilst you’ll no doubt want to use the extra cash from selling your property to reduce the size of your mortgage, alas you are still tied into a deal. So, early repayment charges may also be required of you in such a situation.
Can You Avoid Mortgage Repayment Charges?
Generally, you should try and avoid these fees – something that can be done if you plan effectively. 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 rates and the interest may be higher than you’d get on other deals.
If you want to avoid paying these fees, it would also be worth trying to remortgage at the end of your mortgage deal. This can help you avoid being put on your lender’s SVR, But if you know you’ll be downsizing or selling up shortly, it might be worth sticking with your provider’s SVR for a month or two to give yourself extra flexibility and avoid repayment fees.
In most cases, however, it’s best to wait until your deal ends before getting a new mortgage to avoid paying early repayment charges.