An Early Repayment Charge or ERC is a charge made by a mortgage lender when you repay all or part of the loan amount sooner than the agreed redemption date.
The redemption date may be at the end of the mortgage term or at the end of a special rate product term.
Some mortgage companies will allow their borrowers to repay a lump sum either once or several times during the term of the loan without incurring Early Repayment Charges although most UK mortgage lenders will apply ERCs when the borrower repays more than 10% of the loan before the redemption date. Early Repayment Charges can typically be as much as 6 months interest and so the charge can be significant.
For some of us the idea that we might want to repay our mortgage early (especially if there is a charge for doing so) might seem ridiculous - but wait. None of us knows what is around the corner and who’s to say we won’t receive a windfall at some time in the future that will result in us having say £20,000 drop on our doorstep?
If you have a £150,000 mortgage that you are repaying at 2% per annum over 25 years, making a lump sum reduction of your loan, thus reducing your monthly repayments or shortening the term of your loan might become appealing. After all, who doesn’t want to live debt free?! However, whilst this might be a good course of action, just consider a few other options first.
For a start, do you have a car loan or credit card debt? Dependent on your mortgage lender, you could be paying somewhere in the region of 6% - 20% for this relatively expensive money. The interest charged will depend on whether the loan is secured or unsecured and we have written on this elsewhere. However, if you can repay a £10,000 car loan and £5,000 credit card debt with your windfall and still have £5,000 to put aside for a rainy day, this option might well be a much more sensible option.
In most scenarios, it will be financially advantageous for a borrower to repay expensive debt, such as historic credit card balances, before even considering paying down relatively cheap debt, like your mortgage. Of course, the best course of action is largely dependent on your own personal circumstances.
Either way, when considering the repayment of a mortgage, make sure you understand the charges involved and speak to your mortgage broker first!
For more information or to speak to a mortgage adviser, contact Mortgage Required on 01628 507477.
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