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.
Related articles:
Download our Free First Time Buyers Guide
Recent posts
With the stamp duty relief ending in England and Northern Ireland, we have listed the top 10 cheapest areas for first-time buyers as published by Rightmove.
Are you looking to purchase your first home but unsure where to begin? Here are some tips to get you started.
Choosing which fixed rate to go for has been a dilemma for many of our clients so far this year. There really isn’t a right or wrong answer, but below we will look into the pros and cons of a two-year and five-year to help you make the right decision for you.
Best UK Mortgage Rates this Week
15 days ago
Here are the lowest fixed mortgage rates of the week, available to first-time buyers, home movers, buy-to-let, and those remortgaging.
Call us for more information: 01628 507477 or email: team@mortgagerequired.com.
Stamp Duty Rush as Deadline Looms
16 days ago
According to Rightmove, a whopping 500,000 UK homebuyers are rushing to finalise their home purchase before the new Stamp Duty rules change in April.
The UK government is introducing new rules for Energy Performance Certificates (EPCs) that will impact landlords. Here's a summary of the key changes
Should I buy or rent in 2025?
23 days ago
Choosing to buy a house is one of the biggest decisions you are likely to make in your lifetime. There are many factors that influence a house purchase, these include: finances, housing market conditions, and mortgage rates.
ISAs: what are they, and which one is for me
26 days ago
Since being launched back in 1999 Individual Saving Accounts (ISAs) have been very popular for those wanting to put money into savings. There are four types of ISA, and the majority allow flexible saving and the ability to withdraw funds easily. There are financial penalties on certain products, these usually pay the most interest.
More information
Trusted by
