ESPC Jargon Busters: Early Repayment Charge
In our Jargon Buster series, we break down the terminology of the property industry to help you feel confident and in control of your home-buying journey.
In this article, we’re discussing the term ‘early repayment charge’, and what it means when buying or selling a property in Scotland.
What is the early repayment charge?
An early repayment charge (ERC) is a fee that you may have to pay if you pay back part or all of your mortgage early, even if you change to another lender.
Most mortgages offer a 10% overpayment facility on your current monthly repayments. If you exceed this amount, there is often a charge. The advantage of overpaying is that you will be able to pay off your mortgage balance more quickly.
How much would an early repayment charge cost?
An ERC is usually a percentage of the outstanding mortgage and typically between 1%-5%. Despite 1% seeming like a minor charge, it could still be a big expense if your outstanding balance is high (for instance, 1% of a mortgage costing £150,000 is £1500).
What if you are struggling with your mortgage?
The most important thing to remember is to advise your mortgage lender immediately if your circumstances change so that you can review your options. Missing mortgage payments will have an impact on your credit history and make it very difficult to obtain credit elsewhere.
A solution to this may include extending the term of the mortgage to reduce the monthly payment or switching to a lower rate product.
Porting your mortgage
If you have a mortgage product with early repayment charges, it is usually possible to transfer the mortgage on to a new property. This is called porting and would be subject to your existing lender’s criteria, terms and conditions.
Porting a mortgage essentially means that you are transferring your mortgage to your new property, which can help you avoid any early repayment charges. Porting is only typically used when you are tied into a preferential rate mortgage, usually a fixed rate product but some tracker mortgages have lock-in periods also.
If you require additional funds for your new property, you will need to negotiate with your current lender on the terms of this borrowing. This will generally involve taking on a top-up product for the balance required to run alongside your existing loan amount.
This is normally done under a separate account but sometimes your lender will allow you to align the term of your existing mortgage with your new one to keep things consistent.
Are there any cons to porting a mortgage?
While porting your mortgage could help you avoid early repayment penalties, it can be a difficult process and can limit you to using products from your existing lender.
You may also not be able to consolidate all your borrowing under one mortgage for a period of time – this might mean more arrangement fees in the future to get preferential rates for both accounts until they are aligned.
As each lender has different policies with regards to porting, it is best to get advice from an independent mortgage adviser to work out if it is the right option for you.
What other fees are associated with getting a mortgage?
There can sometimes be an arrangement fee with different mortgage products which can be up to £2000. You can often choose whether to pay the arrangement fee upfront or add it to your monthly repayments, however it’s worth noting that choosing the latter option means that you will pay interest on the fee. There may also be a fee if you use a financial adviser.
A Clearing House Automated Payment System (CHAPS) fee is also required to be paid and includes the lender’s costs for sending the mortgage funds to your solicitor to allow them to pay for the property on your behalf. You will also have to pay the conveyancing fees to the solicitor for looking after the property purchase.
Get in touch with ESPC Mortgages
We can help you work out whether you can port your mortgage, what your early repayment charges will be and which mortgage lender is most suitable for your new property. You can contact ESPC Mortgages on fsenquiries@espc.com or 0131 253 3920.