Understanding Early Repayment Charges (ERCs)
If you find yourself in a fortunate position where you have extra cash or need to make changes to your mortgage, it’s important to understand the concept of Early Repayment Charges (ERCs). ERCs are fees imposed by lenders when you repay your mortgage before the agreed-upon term. These charges are designed to compensate the lender for the interest they would have earned if you had continued with the mortgage as planned.
How ERCs are Calculated?
ERCs are typically calculated as a percentage of the outstanding mortgage balance. The specific percentage can vary depending on the lender and the terms of your mortgage agreement. For example, if you have a mortgage of £150,000 and your ERC is 3%, the total cost to redeem your mortgage would be £154,500.
Different Types of ERCs
It’s important to note that not all ERCs are the same. Lenders have different approaches to ERCs, with some applying a flat percentage throughout the product term, while others utilize a decreasing scale. This means that the ERC percentage may decrease over time, making it more affordable to redeem your mortgage early.
Porting Your Mortgage
If you find yourself needing to move house before your mortgage term is up, you may have the option to “port” your existing mortgage to the new property. Porting allows you to transfer your current mortgage product to the new property, avoiding the need to pay an early repayment charge. However, it’s essential to understand that porting your mortgage is not a given right. It will require a new mortgage application and a full assessment from your lender.
Property Valuation
The Application Process
When you choose to port your mortgage, you will need to make a full application to your lender, just like a new purchaser. This means providing updated documentation such as payslips, bank statements, and proof of deposit. Your application will be assessed against the current lending criteria, ensuring that you meet the requirements for the new property.
Capital Repayment vs. Interest-Only Mortgages
When considering additional borrowing, it’s crucial to understand the different types of mortgage structures available. The most common form of lending in the UK is the capital repayment mortgage, also known as a repayment mortgage.
How Repayment Mortgages Work
With a repayment mortgage, your monthly payments are divided into two parts: interest and capital repayment. Over the term of the mortgage, your payments gradually reduce the outstanding balance until the mortgage is fully repaid. This means that at the end of the term, you own the property outright.
The Changing Balance
In the early years of a repayment mortgage, a larger portion of your monthly payment goes towards interest, while a smaller amount is allocated to repaying the capital. As you progress through the mortgage term, the balance shifts, and more of your payment goes towards reducing the principal amount.
Redeeming your mortgage and exploring additional borrowing options can be a complex process. Understanding early repayment charges, porting your mortgage, and the differences between capital repayment and interest-only mortgages are essential steps in making informed decisions.
If you’re considering redeeming your mortgage or need guidance on additional borrowing, don’t hesitate to contact Hudson Rose, your trusted UK mortgage broker. We’re here to provide expert advice tailored to your unique situation. Call us at 0330 122 9920 or email hello@hudson-rose.co.uk to get started on your mortgage journey.
Remember, making informed decisions about your mortgage can save you time, money, and stress in the long run. Let Hudson Rose be your partner in navigating the world of mortgages.
