Lenders increasing ERCs

With Nationwide making a such a big change to their early repayment charge, it won't be long until other lenders review their own. Where Nationwide goes, others often follow. I will be surprised if we don't see more ERC changes among lenders in the coming weeks. On a £250,000 mortgage, that is an extra £1250 people will now be charged. In the current market, you would have thought lenders would be looking to make more positive steps forward, but this seems like a step backwards by the Nationwide. Sadly, other lenders are likely to follow suit. Back in 2010-2011, we saw a lot of customers paying their ERC to come out of the high 5-year rates from 2007-2008. So this is a purely commercial move to ensure they keep their current lending on the books for the duration of the fixed terms.

Nationwide have increased their Early Repayment Charges (ERC) this week, however they are one of the only lenders to do so. They were one of the lowest up until this move. Prior to this, Nationwide were the only lender for which I have made a justified recommendation to a client to leave their deal early since the explosion of enquiries about this when rates started increasing earlier this year, however I must state that additional factors influenced my recommendation in this situation - not just the low ERC. Nationwide will likely have made this move to align themselves more closely with the rest of the market - having the lowest exit fees may have seen them lose some mortgage customers prematurely in recent weeks and months. It is likely the cost would only have become tolerable to customers in the final year, but as Nationwide send out their renewal deals 4-6 months before expiry, customers will have gone before this. I believe that making an early exit less attractive is Nationwide’s strategy of keeping customers in place to ensure they have the opportunity to offer a new deal in the hope of keeping customer retention high. It could also be seen by the lender as even more important to prevent customers leaving early when they are paying higher rates than it was in a lower rate environment, suggesting that this change has been required to ensure they cover the cost associated with having the funds back sooner than accounted for given the recent higher costs of funding. Perhaps this indicates that they expect lower rates returning in the medium to long term and don’t want customers jumping ship ahead of time. Some lenders have really strict ERCs, as high as 5% all the way through a deal, many others use a sliding scale so the fee reduces the closer you get to the end of a deal and a few will even waive an ERC entirely if you are only repaying due to selling the property. With so many different lender policies and so many factors and calculations involved when working out whether to repay a mortgage early, it is always best to speak to a mortgage broker about the options.

Increasing the Early Repayment Charge (ERC) will often, due to many lenders' pricing models, allow for keener upfront rates. In other words, for those that don't need to break out of the mortgage deal and incur the ERC, that's all good. However, if you are forced into a position where you have to repay the mortgage early, for example you are looking to move and the current lender won't agree to the loan on the new property, then these increases will make a bitter pill even harder to swallow.

An early repayment charge is a fee a borrower will incur if they were to 'terminate' their mortgage product before the fixed term ends, and generally the longer the fixed rate period, the higher the charge. Having said that, some lenders do have products with no early repayment charges. Lenders charge early repayment fees because they’re expecting to make a certain amount of interest by lending to you on a fixed or tracker rate deal, so paying off your mortgage earlier means they’ve lost money. Effectively, they’re passing on this charge to you. Early repayment charges are usually calculated as a percentage of the amount still outstanding on your mortgage. The typical amount is usually between 1% and 5%. The cost depends on how far you are into your deal – so on a 5-year fixed rate deal, for example, you’ll be charged 5% if you leave in your first year, 4% in your second, 3% in the third year, and so on. By way of example, if you had a £200,000 mortgage, it would cost £10,000 to pay off the debt in the first year, but if you switched in year five it would be less expensive, at only £2,000.  In a nutshell, the banks want to make their money, and borrowers will ultimately pick up the bill if they can't.

I suspect lenders are seeing borrowers move away from 5-year fixes and onto shorter two and three year fixed rate deals. So they are pushing up ERC's to compensate for the reduced profits and increased customer churn. Many clients we talk to believe rates will be lower in a couple of years' time. But there's absolutely no guarantee that will be the case. If our 'winter of discontent' erupts into a full-blown wage/inflation spiral, they may remain higher for longer than people think.