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Can someone help me understand early repayment charges please?(11 Posts)
Last year, I bought my first house. I borrowed £80k, of which I've paid back about 5k through paying my monthly mortgage.
I've been very lucky recently and have come into a lot of money. I want to look into paying off the mortgage, and I know I need to pop into the bank to talk about this, but I was wondering if anyone has ever done this and what happens. I fear these are stupid questions but I'm going to ask them anyway...
With the interest rate, the mortgage document says that the total amount payable would be over £110k if I was to pay it over the 20 years. If I pay off the whole amount, would that be for the amount I've borrowed (80k) or for the whole thing (110k?)
My mortgage papers say that the maximum early repayment charge is around 2.5k until October 2022. After this period, there will be no early repayment charge. I expected it to be a lot more than this- does it sound right?
The bank would give you a settlement figure, but you'd expect it to be the outstanding loan (£80k - capital element of monthly repayments) plus any early repayment fee.
The early repayment fee part compensates the lender for the foregone interest if you'd kept the mortgage, but only a small part cos they can then lend that money out again.
Thank you Chasing, that really helps. It's all a bit emotive for me- I never ever thought I'd be able to even buy a house, so am very aware of the privilege. Thanks for replying.
Normally you're tied into a mortgage for a couple of Years. Then the attractive introductory rate changes. It's that period the early payment charges reflect. I have a five year fixed rate so early repayment charges are higher than a two year fixed rate.
ask the bank for a full repayment calculation.
and then get out the calculator.
it might be worth it to overpay the mortgage to the max free amount and then pay off in full once it is up for re-mortgaging.
tbh I would put the max allowed into my pension before paying penalties on a mortgage.
As explained, speak to your lender before you do anything. Most lenders allow you to pay off 10% of the outstanding capital every year without penalty so you should be able to reduce your loan a small bit without penalties.
There are calculators available that help you work out if its worth paying the ERP. This depends on the interest rate on your mortgage and the interest you could get elsewhere. Look on Moneysavingexpert.
Gut feeling is that it's probably not worth it, so assuming this is the case, I would pay off what you can without penalty and put the rest in premium bonds and/or a fixed rate account to earn a bit of interest/chance of prizes until your ERP charges run out. Then pay off your mortgage. The amount you need to pay will be closer to £80k than £110k as the latter figure includes 30 years of interest.
If you have money left over, you need some in instant access, depending on your short to medium term plans, eg moving house, home improvements, starting a business and you might also consider topping up your pension and/or investing further money, but before you do this, you need to read up and think about your attitude to risk. If the sum you have is substantial, eg over £100k, it might be worth talking to a financial planner/IFA, but probably not if the bulk of this money will be taken up by paying off your mortgage.
Another thing to consider if your mortgage rate is very low, eg around 1% is letting it run for now and putting the money in your pension/other investments as over the medium to long term, the growth is likely to be better.
Thank you all so much for this. It's embarrassing how little I understand.
So even though I can pay off the 80K in full, with only a 2.5k early repayment charge, it may still be a more sensible bet to wait in order to waive that charge?
Yes, although psychologically you may prefer just to pay it off.
If you have £80,000 outstanding and are paying say an interest rate of about 2% on the mortgage the interest you pay a year is £1600. So ever year you have paid it off you are saving yourself £1600. So even if you pay the £2500 penalty in your case even just over one year of paying the penalty you are saving yourself 1600 of interest. I don't think you should bother waiting but I can see the pros and cons to it.
You may be able to make an annual capital repayment up to a specific % without penalty.