16 May 2022
The Basics About Early Redemption Charges | What You Need To Know
Whenever you’re taking out a new fixed rate mortgage, there are a few important things to double-check, one of which is how expensive the Early Redemption Charge is. This fee is also known as an Early Repayment Charge and it is one of the largest fees associated with fixed rate mortgages. If you’re not sure what an Early Redemption Charge is or when you would need to pay this fee, keep reading today. Below we have covered all of the basics every homeowner needs to know about this type of fee.
What is an Early Redemption Charge?
An Early Redemption Charge (ERC) is a fee you would be charged by a mortgage lender should you decide to repay all of or part of your loan amount before the previously agreed redemption date. Simply put, the ‘redemption date’ is the end of your mortgage term, so if your fixed mortgage term is five years, then this date would be at the end of these five years.
How much is an ERC?
Unlike other fees associated with mortgage products, mortgage lenders don’t charge a flat rate for their ERCs. More often than not, the cost of an ERC is dependent on things such as; the amount of money you originally borrowed and how long you have left on your mortgage term.
Lots of mortgage providers set the ERC as a percentage of the loan. In some circumstances, this fee could be thousands of pounds and if you’re considering repaying all of or part of your loan amount before the end of the term of the mortgage, it is essential to consider how much it would cost you to do so and whether it would still be cost-effective. Similarly, you should always think carefully about how long you tie into your fixed rate mortgage for in the first place.
When do you have to pay an ERC?
There are lots of different scenarios when you would need to pay an ERC and some common examples include;
- Paying a lump sum that's more than your overpayment allowance
- Paying off your mortgage early
- Swapping mortgage providers
- Swapping to a new mortgage deal
- Selling your home
You would be able to find out how much an ERC is and when you would be required to pay this fee before you take out a mortgage, and it is highly recommended that you double-check your mortgage offer for this particular charge. Learning more about an ERC in advance could save you a lot of money in the long run.
It's worth noting that in some of the situations mentioned above, there would also be other fees that you need to consider. For example, if you’re selling your home and closing your mortgage account, your lender may also charge you an exit fee. Other normal fees include; mortgage completion fee, deeds release fee and exit administration fee, so it’s beneficial to enquire about any extra fees that are payable under the terms of your mortgage.
Do all mortgage products have an ERC?
Generally speaking, all fixed rate mortgages have ERCs and this is simply because they are specifically designed to be fixed for a certain period of time.
You may find that some standard variable rate mortgages, discount rate mortgages and tracker mortgages don’t have ERCs, however, this doesn’t mean they’re the best option available. Often, these types of variable rate mortgages have higher interest rates and this could result in you paying more on a monthly basis for your mortgage.
Speaking to a mortgage expert about ERCs
Hopefully, you will now know a little bit more about Early Redemption Charges and how they could potentially impact you in the future once you have taken out a mortgage. If you’re considering making a lump sum repayment on your mortgage and you’d like to find out more about the charges involved with doing so, don’t hesitate to contact us at Mortgage Required. We are a team of dedicated, independent mortgage experts and we will be happy to assist you. With many years of experience behind us, you can rely on us to provide you with the tailored mortgage advice you need.
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