ERCs- Early Repayment Charges

A question about : ERCs- Early Repayment Charges

hi just a quick question..

i bought a new house not 18mnths ago and wanted to move my mortage with my mortage provider as i was happy with them, i,d only had the mortage with that mortage provider for 12 mnths.

when i spoke with them they refused to give me the mortage as they said they did not mortage to homes on a high street,.. we argued that we are not on a high street but are next to one shop but they wouldnt have it so we had to seek a new mortage provider (either that or not move home)

unfortunatly because we had no choice but to change the mortage provider and we were charged nearly 3k in various charges and clawbacks...

we felt very shortchanged and held to ransom by this mortage provider, is there any thing i can do to reclaim any of the moneys...

Best answers:

• If you changed early and there was an early repayment fee attached then that was part of the contract and you cant claim it back.
• You shouldnt have bought a mortgage with a tie in if you could not commit to that tie in. Its a harsh reality of buying a better deal than the standard variable rate.
• That's a bit misleading, dunstonh. There are loads of mortgage products available without any tie-ins, but at rates far better than standard variable.
• There may well be (well, we know there is!) but the choice to go into a product with a tie in is your own. You do so to get better terms than the standard variable rate. The terms are on the offer letter which you sign before the money is advanced. The solicitor tells you the terms of the contract before you sign (assuming you havent skipped that to save a few pounds). If you dont think you will be able to honour the contract then you shouldnt enter into it.
• Of course I agree with you dunstonh.
  The big problem is that just because a mortgage product with a tie-in is "portable", people believe that they'll definitely be able to "port" it to a different property.
  The problem is that there are so many reasons why this won't work - the lender doesn't like your new job, or your new property, or the fact one of you've given up work to have children, or whatever - so I would strongly suggest never buying a mortgage with a tie-in unless you are 100% certain you won't want to redeem during the tie-in period.
• It's not unfair. Each lender has its own underwriting guidelines and if any of the circumstances of your new mortgage don't meet those guidelines, they aren't going to lend you the money.
  What would be better, though, would be for lenders to be clearer about what portability means and particularly the circumstances in which it may not be available. This might make people more likely to choose products with no ties, rather than supposedly portable ones.
  But more likely, it would make no difference because, as you say, you didn't intend to move during the term. I'm sure that hardly anyone takes a tied product intending to redeem it.
• I asked for this thread to be made sticky because there are very frequent questions asked about ERCs, particularly with the recent publicity given to MEAFs.
  I'd like to set out some points which I hope will help people asking about ERCs, whether they are lawful, why they are charged, and how they can be avoided.
  What is an ERC?
  An ERC is an Early Repayment Charge, which is FSA mandated terminology for a charge made when you redeem your mortgage during a mortgage's ERC period. The ERC period may be the same as the fixed or discounted term, or it may be longer. Normally it is not the same as the total repayment term of your mortgage.
  An ERC is different to an MEAF (Mortgage Exit Administration Fee) which is a charge to all of a lender's mortgage customers when they redeem their mortgage (but which is sometimes waived if the mortgage runs for its full repayment term). The FSA's recent guidelines, and Martin's recent "Reclaim, Reclaim, Reclaim" programme, were both about MEAFs and have no applicability at all to ERCs.
  ERCs are relatively easy to recognise. Rather than being a fixed amount like Ј195, Ј250 or Ј295, they will be either a percentage of the value of your loan, or a number of months' interest (typically 3 or 6, but could be more or less). So the amounts will normally not be round sums and they are typically far larger than MEAFs.
  Are ERCs lawful?
  Yes, absolutely. There haven't been any FOS or legal cases, or any FSA guidance, which have said that, in general, ERCs are unlawful. They are not penalties for breach of contract. They are agreed charges in the event that a borrower chooses to redeem their mortgage during the specified ERC term which is a right the borrower has to exercise if they choose to.
  Just because an ERC is a lot of money doesn't make it unlawful or unenforceable.
  As long as the ERC was clearly stated up front in your mortgage offer, KFI or similar document, it is legally binding and you have to pay it.
  The FOS will not support an argument that it's too much and you don't want to pay it.
  Why are they charged?
  ERCs are charged because mortgage lenders incur up-front costs setting up mortgage accounts (which aren't always covered by the up-front fees) and often charge interest rates which are less than it costs them to borrow the funds. So they lose money during the fixed or discounted term unless borrowers stick it out for the full fixed or discounted term (and then some).
  If people leave during the ERC period, the lender would almost always lose money if the ERC was not levied. They are not prepared to do this - and if they did, they'd effectively be making customers who stay with them subsidise those who opt out early, which isn't fair.
  It's a fact of life (due to competition in the mortgage market) that most lenders will lose money if someone has their mortgage for exactly 2 years on a 2 year fixed or discounted product. That's hard luck on the lenders as extended ties (where the ERC period is longer than the fixed or discounted period) have become politically incorrect over the last few years. They are creeping back in, but this is mainly because of deep discounted loans.
  Deep discounted loans are those which offer exceptionally cheap rates for the first 6 months, or year, or two years. The only way for these to make money for the lender is if customers are tied in for an extended period after the bargain rate ends. So, for example, there have been times when lenders have offered 0.99% for a year (or 6 months) followed by 5 years (say) at their standard variable rate during which you are tied in by an ERC. Arguing that this is unfair is ridiculous - the 0.99% rate is blatantly loss-making and for some borrowers it is great to have very low payments for the first year. It's a matter of customer choice whether being tied in for a further 5 years is a good, or bad, idea.
  How can they be avoided?
  This depends on the lender. There are a few ways to avoid ERCs, either before or after taking out the original mortgage:
  up front
  The best way to avoid ERCs is up front. If you have even the slightest inkling that you will need to move house, or sell up completely for another reason (e.g. emigrating) during the tie-in period, then avoid the ERC up front.
  This is easy enough to do - buy a mortgage without any ERCs. There are lots of these available. Obviously you won't get the best rates - but you are paying a premium for the increased flexibility you need.
  after the event
  It's harder to avoid ERCs after the event.
  If you've taken out a mortgage with an ERC for (say) 5 years, and 2 years in you realise you need to move house because your family's grown, or you need to move area for your job, you could try porting the mortgage.
  Most lenders (now) will allow you to port the mortgage to your new property. So, if you have a Ј100k mortgage on your current property with 3 years of your original 5 year fixed left, and you need Ј150k mortgage on your new property, you would move the existing Ј100k mortgage to the new property (with the original 5 year fixed rate, for the remaining 3 years) and take out a new product for the other Ј50k. You'd have to pay the normal fees for the new Ј50k element. Even if the new mortgage was for the same amount, you'd probably have to pay valuation fees and the like.
  There are problems with this. If the lender doesn't like your new property, or your current income, or your current type of employment, they may be unhappy to lend you the new Ј150k, or even the existing Ј100k. If they won't allow you to port the mortgage, that's hard luck - you can't, and you'll have to pay the ERC.
  This is the reason why I would always recommend ignoring portability and opting for a "no ties" product if there is any chance you might need to move during an ERC term.
  Other methods of avoiding ERCs after the event are to retain the property for a few months (or years) longer, and let it out rather than redeeming the mortgage and triggering the ERC. This raises its own issues:
  - you need your lender's permission to let; they will charge for this and may refuse it or make you switch to a Buy-to-Let mortgage, triggering the ERC in any case (but many won't do this, at least in the short term);
  - you have increased financial risk as you will have two mortgages (probably) and may incur a financial loss if the property is vacant or the tenants don't pay their rent.
  I hope that these comments are helpful. The main nub of my advice is that it's best to avoid ERCs up front, rather than after the event, because it's very hard to avoid them after the event.
  Don't be so desparate to save 0.2% on your mortgage rate that you tie yourself in with an ERC when you could have avoided it, if you really think there's a chance you might have to redeem early.
• What about overpayments?
  The previous thread talked about the overall picture with ERCs, particularly in the context of redeeming your mortgage early.
  But what happens with overpayments?
  The picture varies considerably between different lenders and different products. Apologies for the A&L bias in this section but that's who my mortgage(s) have been with so I understand their arrangements best.
  The key alternatives are as follows:
  no penalties for overpayments at all
  A&L's discounted and tracker products (for example) have no penalties for overpayments at all. This is the most generous treatment of overpayments.
  I'd like to hear of other lenders which take this approach on mortgages which have ERCs for redemption, but not for overpayments.
  This sort of mortgage is therefore ideal for people who know they are likely to come into a lump-sum in future, but don't intend to redeem the mortgage in full.
  overpayments allowed up to a limit in each year
  Many lenders allow you to overpay up to 10% of the loan each year (and this can be 10% of the balance at the start of the year, or 10% of the initial loan, depending on the lender). Some lenders only allow this overpayment at particular times of year - e.g. January for A&L fixed rate mortgages.
  ERCs charged in full on overpayments
  This is the worst sort of arrangement, but quite a common one. With many lenders, if you overpay anything at all during the ERC term, you'll be charged a pro-rata ERC on the amount overpaid.
  Most lenders in practice have a minimum amount below which they don't bother to charge - with Nationwide, for example, it's £500 per month. That's simply because a 3% ERC on a £400 overpayment is only £12 and it's not really worth the hassle of collecting it, as well as because it makes the products look more attractive to the potential customer.
  Many lenders will operate this sort of minimum limit without it being documented in Ts & Cs - a bit of trial and error will enable you to find out what the limit is for your lender, if asking them the question doesn't reveal it.
  How to avoid these charges?
  If you have ERCs which you can't avoid in the ways described above, the simple way to avoid these charges is to save up your overpayments until the ERC period ends. In many cases, this will be better value than incurring the ERC, but it depends on the rate you are paying on the mortgage, the rate you could earn on the savings, and the amount of time until the ERC period ends.
  In other words, rather than overpaying £100 a month on your £100k mortgage which has a 2 year ERC, save up the £2,400 in a savings account (even better if it's an ISA as it's tax free interest) and then when you remortgage, just borrow £97,600 rather than £100k and pay the £2,400 to your solicitor to net off the mortgage. (Example assumes interest only to make the numbers easy, but you catch my drift I hope).
• Having read the above should I be charged £25 a year by my mortgage lender for making over payments?
  Here's the situation, my current lender will allow me to make over payments as I have a fully flexible mortgage however they will only collect by direct debit and only the required monthly amount. If I want to make monthly over payments I have had to ask them to cancel the dd and I have to send the money by standing order. Surely this £25 charge is unlawful. Does it cost the lender £25 in admin to change from a dd to a standing order and certainly not on a yearly basis? I not sure they could justify this?
  Would love to hear back from anyone with any comments.
  Oily
• The reason this has come about was I wanted to increase my monthly payments rather than phoning them up and making a one off payment. In order to increase the monthly payments I had to send them via standing order, it was not possible for the lender to increase the dd hence I incur a Ј25 annual charge.
• I can't work out if I might have paid/pay an ERC from what I've read. I sold my flat after about 4 years (mortgage was probably 25 years term) but took out a new mortgage with my partner after about 3 years (so there was an overlap of 1 year). Both mortgages were with the halifax. So, if you sell, does selling count as early repayment? I'm wondering whether the same will apply when we sell our current house...
• Check your contract. It tells you the tie in period there.
• I am replying to you.
  The contract offer letter you are given when you take out the mortgage (or when you remortgage/change deal later on) tells you the terms of the borrowing as well as the tie in period and the amount of penalty that will apply on early redemption.