Early repayment charges

I have seen an increase in borrowers paying the early repayment charge, to change deal early to lock in a new 5 or even 10 year fixed rate now to ride out any future rate rises. Im seeing most borrowers want medium to long term security and are worrying about the future. On the other hand, due to the soaring property values, borrowers are wanting to access the equity in their property for home improvements, if a further advance is not possible with the existing lender, it is worth considering the cost of a remortgage and paying the Early repayment Charge (ERC) versus a second charge. It is usually more cost effective to remortgage the whole balance onto a new low rate than that offered by second charge lenders. The key time that paying early repayment charges are beneficial and cost effective for homeowners is remortgaging an existing equity release plan. Borrowers on historic interest rates remortgaging from a 6% interest rate to around 3.50% can potentially save thousands in the interest charged over the term of their lifetime mortgage, even factoring in an early repayment charge to pay. The most important thing to consider is an experienced whole of market mortgage and equity release advisor can help you review your options and provide cost comparisons for each available option. Cheap deals found online are not always best!

A scenario that was a once in a blue moon is now coming up multiple times a week. Clients are seeing all their other costs skyrocket and want some degree of certainty over their largest expense and who can blame them? Their mortgage is about the only outgoing that they can control the price of. Time will tell whether the clients breaking the cycle of 2 yearly remortgages actually save any money.

In the Equity Release market we have seen a huge increase in the number of clients paying their Early Repayment Charge to leave a high interest rate Lifetime Mortgage to move to a lower fixed rate for life. Even a year ago, noone knew that you could remortagage from a Lifetime Mortgage to another product but gradually as we have spread the message, an increasing number of clients (and our Introducers) are reviewing their product. We are able to calculate how much moving from a higher rate to a lower interest rate will save a client and how many years this would take to become worthwhile. When compared with life expectancy data, it is often the case that remortgaging is the correct option. Clients on interest rates of over 7% fixed for life have achieved new rates of under 3% by completing a remortgage.

Without a doubt at a time when mortgage rates are rising, more and more borrowers will look to see if it might be more prudent to pay an early redemption charge now and fix to a long term rate before they increase even further. This is however a complicated issue and it depends on three factors. Firstly, what do clients think that will happen with mortgage rates and what impact that could have on their payments, the size of the early redemption charge itself and how long it is due to be left in place. Many borrowers would not have experienced rising rates and to some that will be very stressful, it is the advisors job to ensure that their decision is as fully infomed as possible.

This is one of the main types of enquiry I am getting at the moment and the justification as to whether it is worth it varies on a case by case basis. The only accurate comparison that can be done is the cost difference between the existing scenario versus the new scenario, up until the end of the current early repayment charge (ERC) period, as after that we are into unknown territory as to what rates would be available at that point. If it makes financial sense within the current ERC period then its a no brainer but more often than not the cost of the ERC will outweigh the savings on interest so at that point you have to take a view.