by Mark Johnston
Buying a house is one of the biggest purchases will make in their lifetimes and unless they are really lucky they need to take out a loan to pay for their dream house. Finding the right mortgage can be a tricky business. Different people have different circumstances so there isn’t one product that fits everyone.
Most borrowers concentrate on the amount a mortgage will cost in monthly repayments. Whether its a discounted, tracker or fixed rate mortgages , most borrower will look at current interest rates and the future potential for any increases and decreases before making their decision, but this isn’t all we should consider.
Research by HSBC shows that borrowers should also look at the cost of leaving a lender, this is usually referred to as early redemption. There are many reasons why you might pay your mortgage off early, don’t just think that you wont just because you don’t see yourself as having the money in the future.
If you decide to move lenders or switch mortgages with the same lender before your mortgage term is up, you may have to pay the early redemption charge as you will pay back the original loan amount with the funds raised on the new mortgages. Depending on how much your early redemption charge is, the fee turn out to be very high.
The early redemption or repayment charge (ERC) will be outlined in your mortgage agreement but may not have been highlighted to you clearly enough when you took the mortgage out. This will tell you the amount of penalty the lender will charge you to be able to leave your agreement before the maturity date. Remember, this isn’t the full term of your mortgage i.e. typically 25 years, its the length of the mortgage product which is usually two, three or five years but can be much longer.
Many lenders such as HSBC and the Co-Op only charge around 1% of your balance to be able to leave early whilst others such as the post office and nationwide try their customers in with up to a 5% penalty.
An example of this would be a borrower with an outstanding mortgage of £250,000 but have to pay a penalty of £2,500 with the likes of HSBC whilst Nationwide would charge a massive £12,500.
Most lender charge ERC on a staggered bases so each year the amount does down. Where year one might be 4%, year two might be 3% and so on so the longer a borrower is with a lender the cheaper it is to leave.
With such a low interest rate and lenders falling over themselves to lower their rates, many borrowers are seeing very attractive deals but are unable to take them due to high ERC’s. With this in mind its worth considering this when taking out a new mortgage.
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