Early Repayment Charge: more borrowers paying to exit fixed rate mortgages

With rates only going up from here, for some borrowers it makes sense to remortgage now, even if that incurs a fee.

There are all sorts of extra costs to consider when signing up for a mortgage, beyond the headline interest rate.

After all, plenty of mortgages come with arrangement fees ‒ essentially a fee paid so that you can get the mortgage you want ‒ while you will also face certain fees when leaving the loan.

What’s more, according to Yorkshire Building Society, one of the nation’s biggest mutuals, there has been a notable increase in the number of borrowers paying an exit fee to get out of their current mortgage deal.

The lender reported a 34% rise in the number of borrowers who paid an Early Repayment Charge (ERC) in the first two months of this year, compared with 2022.

There's also been a rise in the number of borrowers paying exit fees in the first two months of 2021, when there was also a rush to escape existing deals.

And as someone who has just done exactly that, I come from a position of understanding just why so many borrowers are willing to take the hit in order to secure a cheaper mortgage rate.

Looking into your crystal ball

It’s interesting that last year saw something of a spike in borrowers paying exit fees, since the circumstances were rather different.

Back then the housing market was in the grip of the stamp duty holiday, where buyers could escape paying tax on the first £500,000 of any purchase.

There’s no denying that this was a powerful driver for would-be homebuyers, as Stamp Duty can end up being yet another punishing expense when moving home.

After lockdowns, and the move to spending more time working remotely, plenty of people decided that they wanted to find a more appropriate property and the opportunity to save a few quid on a Stamp Duty bill was too good to turn down.

And in order to do that, for some borrowers, it would have meant paying off an existing mortgage and incurring an exit fee in the process.

While mortgage borrowers paying an exit fee today are also motivated by the future, it’s from a rather more pessimistic viewpoint.

Tackling rising inflation

Last week saw the Bank of England’s Monetary Policy Committee opt to increase Base Rate to 0.75%, the third increase in just a few months. 

The bank’s main focus is to keep inflation at manageable levels, and the reality is that this isn’t happening at the moment.

In fact, inflation is registering at its highest levels in three decades, and so in a bid to get that under control the Bank is increasing Base Rate, in the hope that this will dent our spending appetites a little bit.

However, it is going to take more than a Base Rate at 0.75% to do that.

The markets fully expect ‒ and have priced in ‒ further increases this year, with Base Rate projected to be at around 2% in the early portion of next year.

And inevitably base rate rises translate into higher mortgage rates. This is obviously the case for tracker rates, given they move in line with Base Rate, but base rate changes tend to see lenders pulling and repricing their deals.

In other words, the cheap fixed rates that have dominated the market over the last couple of months are disappearing, to be replaced by more costly alternatives.

Pay now to save tomorrow

As someone who just this week paid an ERC in order to remortgage, I can very much understand why so many borrowers have done so.

I had a year left on my five-year fixed rate at 1.87%, and to leave it I would have to pay a fee worth 1% of the outstanding mortgage. That’s not a tiny sum, particularly at a time when the cost of EVERYTHING seems to be going up.

However, doing so meant that I could get a rate of 1.57%. In other words, remortgaging today meant that I could actually reduce the size of my monthly mortgage bill.

Now, let’s be honest, a 0.3% saving doesn’t work out at a huge saving on a monthly basis.

But my thinking was that by the time I come to remortgage, the deals on offer are unlikely not only to be at 1.57% but are likely to be above my current 1.87%.

Essentially, by moving now I can cut my mortgage bills for the foreseeable, but waiting would mean that my monthly expenditure would actually go up.

Again, at a time when the costs of virtually everything are rocketing, the thought of higher mortgage bills is not exactly an attractive one. So I’m paying today so that I can save over the longer term.

How much is too much?

The ERC you pay will vary based on how far into your initial rate you are.

For example, I was on a five-year fixed rate, and each year the ERC dropped from 5% down to 1% for the final year.

While I could stomach paying a 1% fee, any higher than that and I might have struggled.

This is the conundrum that mortgage borrowers, who are tempted to remortgage, now face.

How much are they willing to pay to get out of their existing deal?

Are the rates on offer today going to represent enough of a saving two, three or four years down the line to justify paying that money?

And, crucially, do they even have the money to hand to pay that exit fee, since in many cases it has to be paid up front?

There’s no easy answer to this, and it’s a debate that is only going to grow stronger among borrowers as rates continue to rise.