When paying off your mortgage early, you may come across terms such as ‘mortgage redemption fee’, ‘mortgage exit fee’ or ‘mortgage early repayment charge’ (ERC). But what is a redemption fee on a mortgage? How does it affect your finances?
A mortgage redemption fee is a cost that some lenders charge when you fully repay your mortgage before the agreed mortgage scheme term ends. Understanding these fees is important to avoid unexpected costs when refinancing or repaying your loan.
In this guide you’ll learn:
- What a mortgage redemption fee is.
- Why are mortgage redemption fees charged?
- How much is a mortgage redemption fee?
- Why you may be charged a redemption fee.
What is a Mortgage Redemption Fee?
A mortgage redemption fee is a charge your lender may apply if you fully repay your mortgage before the agreed scheme term ends. This fee is also known as Early Repayment Charges (ERC). For example, if you were to leave a 5-year fixed rate mortgage after 2 years, you may face ERCs.
Why do Lenders Charge Mortgage Redemption Fees?
Lenders charge redemption fees or ERCs to recover potential financial losses when you pay off the mortgage and exit a mortgage scheme early. Here’s why these fees exist:
- Loss of Expected Interest – Lenders expect to earn interest over the full mortgage term. If you repay early, they may lose out on this income. often lenders have borrowed money on set terms on the money market to be able to lend it out to consumers They are likely to continue to be committed to the terms of this arrangement if the borrower repays the mortgage before the fixed rate or other scheme was due to end.
- Administrative Costs – Processing an early repayment or mortgage switch involves paperwork, account adjustments and administrative work. Lenders look to cover this through these ERCs ot other redemption fees.
- Discouraging Early Repayment – Some lenders may use ERCs as a deterrent. They leverage them to encourage you to stick with their original loan term instead of switching to another lender, for the reasons stated above.
Please Note: Here at Stuart Brown Mortgage Services, we encourage you to check your mortgage terms before making any early repayments, to avoid unexpected costs, contacting us for clarification if nevessary.
How Much is a Mortgage Redemption Fee?
The cost of your mortgage repayment fee is determined by your outstanding mortgage amount and normally how far into the scheme term you are. Typically, you should expect to pay between 1-5% of your remaining balance. However, this percentage often decreases each year of your mortgage deal term.
E.g., A £300,000 mortgage could cost you £15,000 (5%) in ERCs in the first year. By the fifth year, it may cost you £3,000 (1%) in ERCs.
Reasons for Mortgage Early Repayment Charges
There are a few scenarios where you could be made to pay ERCs:
Repaying too Early: If you pay off your mortgage before your agreed scheme term end date, lenders may implement ERCs.
Switching to Another Lender: If you remortgage before your term ends, your lender loses out on expected interest.
Overpaying Beyond the Allowed Limit: Some lenders allow limited overpayments (e.g., 10% per year), but exceeding this may trigger an ERC.
Moving House (Without Porting the Mortgage Scheme) – If you sell your home and don’t transfer (port) your existing scheme from the current mortgage, to thew new mortgage on the new property, your lender may charge an ERC.
Expert Advice and Guidance at Stuart Brown Mortgage Services
At Stuart Brown Mortgage Services, we understand that navigating mortgage redemption fees and early repayment charges can be complex. Our expert team is here to provide clear, reliable advice to help you make informed decisions about your mortgage.
Whether you’re looking to remortgage, pay off your mortgage early or reduce potential charges, we’ll guide you through your options. We take pride in ensuring you find the best solution for your financial situation.
Contact us today for expert mortgage advice tailored to your needs
Monthly Budget Planner
Monthly Budget Planner