Beware of this rip-off mortgage cost

Choose your mortgage purely on the basis of a low rate and you could lose out later on with this easily missed fee.

Anyone looking for a new mortgage right now is bound to be swayed by super low rates. It’s one of the very few positive repercussions of the financial crisis. But the true cost of a mortgage goes far beyond the headline rate.

After all, mortgages can be littered with extra charges. The product fee alone, which covers the cost of arranging the loan, can sometimes run to thousands of pounds. This can transform what appears to be a cheap mortgage on the surface into a very uncompetitive deal.  

Early repayment charges

But the upfront fees aren’t the only extra costs you should look out for. You should always check the cost of changing your mind if you decide you have to remortgage early. Nearly all fixed-rate mortgages will impose an Early Repayment Charge (ERC) if you redeem your loan before the fixed-rate period has come to an end. This penalty also applies to some, but not all, tracker mortgages.

The trouble is each lender has its own take on ERCs and some can work out to be very expensive indeed. You may also be hit with various random exit fees to cover the cost of “administration” and the like.

In an ideal world, you would never commit to a mortgage unless you could be sure you could cope with it until the ERCs no longer apply. But circumstances can change unexpectedly which could force you into redeeming the mortgage earlier than you thought.

For example, a property may need to be sold while the special rate period is still in place as the result of a breakdown in a relationship. This could trigger an ERC even though it’s completely beyond the borrower’s control.

ERCs and five year fixes

In any case, it’s important you understand exactly what you’re signing up to whenever you take on a new mortgage.

With this in mind, the table below shows the ERCs which are applied to the best five year fixes on the market right now.

This type of deal is a popular choice with borrowers who prefer not to take a gamble on whether interest rates will stay low for the foreseeable future. And we have advocated today’s cheap longer-term loans for the guarantees and peace of mind they offer. But, at the same time, five years can be considered a reasonably lengthy commitment, so it’s worth checking what ERC would be incurred if you had to remortgage ahead of schedule before you dive in.

To show you what I mean, I’ve assumed that you decide to remortgage 12 months before the end of the fixed-rate period and the outstanding mortgage loan at that time is £150,000, while the original mortgage loan was £175,000. Let’s take a look at how much the ERCs would set you back:

Top five-year fixed rate deals with ERCs

Source: Moneyfacts

You’ll have noticed there’s a wide disparity amongst the lenders in the total charges for redeeming your mortgage early. But even the lowest ERCs are very costly and best avoided if at all possible. With some lenders, the ERC reduces the closer you are to the end of the fixed-rate period, but this isn’t always the case. Other lenders charge the same fee no matter when you remortgage early.

HSBC charge borrowers the cheapest ERC of the best-buys, but the fee still runs to a fairly chunky £1,500 for switching elsewhere with one year of the fixed-rate period remaining. Meanwhile, at Mansfield Building Society, the charge is far heavier at £5,400. This is because it’s calculated as a percentage of the mortgage advance. (This is the amount of your original mortgage loan - £175,000 in this example.)

Recent question on this topic

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Lenders which set the ERC in this way far are more costly than lenders which base it on a percentage of the sum you have repaid - like HSBC. If you were remortgaging, the sum repaid would be equivalent to the total value of your outstanding mortgage (£150,000 in this example). So it’s worth taking into consideration how the ERC is calculated for the particular mortgage deal you’re interested in.

You should also be aware that ERCs usually apply to overpayments, but most lenders will allow you to overpay by a certain percentage - typically 10% of the outstanding mortgage - before the ERC kicks in.

Mortgages without ERCs

Virtually all five-year fixed rate deals charge an ERC, but is there any way of keeping your options open while avoiding this potentially hefty cost?

The good news is there are numerous variable rate deals which don’t charge ERCs at all. For example, with the three market-leading lifetime trackers, you can change your mind at any time without incurring the penalty. This is an important feature which allows you to switch for less if interest rates move against you.

The table below summarises the total redemption charges applicable to the top six tracker deals:

Top trackers without ERCs

Of course, you should never base your mortgage decision solely on the ERC, but these tracker deals are far less costly on early redemption than the previous selection of fixed rate loans. That said, there are plenty of trackers which do charge ERCs, so watch out for these too.

What happens if you want to move home before the deal ends?

Most mortgages are portable which means when you want to move home you can take your loan with you. Re-jigging your mortgage in this way shouldn’t be subject to an ERC as long as you borrow at least the same amount for the buying the new home as you were for the original property. But you may not be so lucky if you want to downsize and ultimately borrow less.

Compare mortgages at lovemoney.com

More: Get a mortgage at 1.99% | Get £4,500 cashback with this mortgage

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a discounted tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.