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Remortgage with an early repayment charge

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Remortgage with an early repayment charge

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Last reviewed on 6th September 2021

Deciding whether to remortgage early or to wait until your fixed term expires is a dilemma many of us often face. As interest rates are low, many homeowners are deciding to remortgage, even if it means having to pay an early repayment charge (ERC).

Each time you remortgage, the conditions will vary and so will the early repayment charges involved.

For instance, securing a lower interest rate than your current mortgage doesn’t guarantee you’ll be saving money. In addition, avoiding an early repayment charge isn’t always the best option overall.

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Should I remortgage early?

Calculating the cost of your overall mortgage and comparing it to a new deal is always a great place to start. Factoring in fees such as early repayment charges is also very important.

Once you’ve calculated your mortgage, it will become clear whether you should switch deals or keep your existing deal.

If an early remortgage will save you money, then it can be a good idea to switch lenders. Furthermore, your existing lender may also have better deals than what you’re currently on.

Use our remortgage calculator to check whether switching deals can save you money.

How much does it cost to leave a mortgage early?

The three main costs you must consider when deciding to remortgage early are:

  • Charges for leaving your mortgage early
  • Costs of starting a new mortgage
  • Your new mortgage rate and terms

Many lenders will have what’s called an early repayment charge (ERC). It’s likely you’ll need to pay this if you choose to leave your mortgage early.

This is especially true with fixed-rate, capped-rate and cash-back mortgages but can also apply to other mortgage types too.

What is an early repayment charge?

Early repayment charges are put in place by lenders and are legally binding terms of your mortgage. Lenders do this so they’re protected against financial loss from mortgages ending early.

This is because lenders calculate their rates based on an entire mortgage term which makes it viable for them to lend. An ERC can then be used by lenders to recoup any losses as a protection measure.

An ERC can also be calculated as a percentage of the amount you still owe to your lender. Ultimately, the amount of your ERC depends on your lender and the terms and conditions of your particular mortgage.

Can I remortgage if I’m not in a fixed-term?

If you’re not in a fixed-term, you may be able to remortgage with little or no cost.

It’s important to check the cost beforehand, as an early repayment charge can be thousands of pounds. If so, you may be better off waiting until your fixed-term expires before you remortgage.

How much does it cost to start a new mortgage?

The cost of starting a new mortgage typically involves:

  • Arrangement fees
  • Survey and valuation fees
  • Legal fees
  • Reservation or booking fee

Some mortgages may include some or all of the fees above. Other deals may have free legal work or even free valuations included as part of the deal.

Nonetheless, each cost will accumulate which you’ll need to calculate. This is in addition to the cost of ending your deal early. You can then decide whether starting a new mortgage will be cost-effective.

Once you’ve calculated all of the costs involved, the best option should be clear. You should consult an experienced broker who can check this for you. We’ll be able to compare hundreds of deals and check the cost of each mortgage.

It’s also important to remember that even if you wait to remortgage once your term ends, you’ll still be charged to start a new mortgage. The only charge that you’ll save money on is an early repayment charge.

Read more: Remortgage fees explained.

Can I avoid an early repayment charge?

If you’re approaching the end of your fixed mortgage term, you may be able to secure a rate six months in advance. This way, you can agree on a better rate and remortgage when you’re able to.

The incentive here is that you should be able to remortgage without any early repayment charges.

Some lenders will only allow you to secure a rate for three months in advance, so do check with each lender beforehand. Our advisors can also help you with this.

Securing a mortgage rate in advance can be quite useful, especially if rates are low or you think interest rates may rise. That being said, there are risks involved if you choose to agree on a rate in advance.

Lenders will typically charge a booking fee or an administration fee to reserve a mortgage deal. In doing so, you risk losing the fees you’ve paid if you withdraw at a later stage.

This can happen if better rates emerge after you’ve paid a fee to secure a now unfavourable deal. Furthermore, if you decide to ditch the deal you’ve paid for, you’ll more than likely be charged cancellation fees.

It’s recommended to speak to an advisor before you commit to a new mortgage. We’ll be able to advise you on what direction the market seems to be going. This is because we’re constantly in touch with mortgage rates and lenders on a daily basis.

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Factors to consider before remortgaging early

If you’re thinking about a remortgage, there are other factors to consider in addition to the costs involved.

It’s a good idea to check the following before applying with a lender:

  • Your income and affordability
  • Equity in your property
  • Reducing your loan to value
  • Your credit score

By taking these points into consideration, along with the costs of ending and starting a mortgage, you should be on the road to remortgage success. Furthermore, you may be able to save a huge chunk on any future mortgage payments.

Are you able to borrow the amount you need from a remortgage?

Each lender will carry out its affordability checks in a different manner. Some are less strict with remortgages, but other lenders aren’t.

For instance, certain lenders will only lend up to three times your annual income, whereas other lenders may lend more, possibly five times your income.

Just because your existing lender agreed to your mortgage amount, doesn’t mean every other lender will. That said, if you’ve been paying your mortgage and haven’t borrowed any more, then you shouldn’t have any problems with affordability.

In comparison, if your income has drastically reduced since your mortgage started, you may run into problems.

Consult an advisor if your income has reduced since your mortgage started. We’ll then check which lenders are likely to say yes and the amounts you’ll be able to borrow.

Why is equity and loan to value so important for a remortgage?

The amount of equity you have in your property can make a huge difference if you remortgage early. If you have little equity it can be difficult to remortgage. Having no equity or being in negative equity will make it impossible to remortgage.

A remortgage shouldn’t be difficult if you have a lot of equity in your home. This is especially true if the rest of your application is satisfactory. You may even be able to release some equity for home improvements or towards buying another property.

How can I calculate how much equity I have?

To calculate your equity, simply deduct your mortgage balance from the value of your property. The amount remaining will be the amount of equity you have.

If your property has increased in value, you may be able to reduce your loan to value (LTV). This helps to unlock better deals, as the best rates are usually tied to lower loan to value mortgages.

For instance, if you remortgage at 60% LTV, it’s likely you’ll be offered the most competitive rates. In comparison, if you want to remortgage at a higher loan to value such as 80-90%, the rates won’t be as attractive.

Check your credit score before remortgaging

It’s a good idea to check your credit score before applying for any type of loan, including mortgages. Downloading your credit file won’t harm your credit score. Footprints are only left on your credit file each time you actively apply for finance.

It’s usual for issues to be flagged on a credit file that you may not be aware of. If you apply to remortgage but are declined due to having poor credit, it can further impact your credit score.

On a positive note, as you already have a mortgage, lenders are able to assess whether you’ve made your mortgage payments on time. In doing so, it improves your mortgage chances, even with slight credit problems.

Nonetheless, consult an advisor if you find anything on your credit report. This is because lenders may decline you simply because of your credit report.

Specialist advice for early remortgages

There’s a lot to consider before committing to a remortgage. There’s a lot more to think about than just finding a better mortgage rate. If you truly want to check whether or not you’ll save money, speak to an experienced advisor.

Make an enquiry and our advisors will calculate everything for you. Furthermore, we’ll search the entire market for any possible deals you’re eligible for.

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About the author

Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.