I took out a five-year fixed-rate mortgage with Santander four years ago. My circumstances have changed and now I need to move.
Although I knew there was an early termination payment, I didn’t realize that the payment does not reduce over time like other mortgages.
On the other hand, the sanction is fixed in the right of 5 percent until the end of the fixed term. I know he clearly says it in the fine print, but he caught me by surprise and I find it very unfair.
Is this reasonable and can I do something about it? Via email.
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David Hollingworth replies: Early Repayment Charges (ERCs) are a very important item to consider when selecting a mortgage deal.
It is generally best to try to enter into a mortgage agreement without waiting for the mortgage to be changed or paid in full, which could result in a penalty.
However, life will always throw the unexpected at us, which may mean that ERCs could become a bigger problem than anticipated.
Early repayment fees are there to protect the lender from borrowers calling in the mortgage, leaving them with funds they could no longer lend at the same rate.
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For example, if a borrower accepts a fixed offer, the lender will have priced that offer according to the cost of financing plus any margin at that point.
If rates later fall and the borrower repays the loan to take advantage of a lower rate, it could leave the lender with funds that it can no longer lend at the required price and, in effect, lose the deal.
As a consequence, lenders apply an ERC to effectively commit the borrower and at least ensure that they are compensated if they leave.
ERCs are typically expressed as a percentage of the repaid amount and can easily be on the order of 3 to 5 percent of the mortgage, sometimes more.
As you have noted, many lenders will have an ERC structure where the fee is highest at the beginning of the mortgage and gradually reduces over time.
Our reader has been caught by Santander’s early repayment charges when trying to move house, is there anything they can do?
For example, that might make a five-year deal charge 5 percent in the first year, dropping to 4 percent in year two, and 3 percent, 2 percent, 1 percent for each remaining year. HSBC even lowers the chargeable amount per day.
Santander is a lender that has in the past charged a fixed ERC over the term of the agreement and that has generally been 3 percent for a two-year product or 5 percent for a fixed five-year agreement.
You will also get back any benefits package that was applied to the original offer, as a refund.
Lenders can change their approach, so it’s always important to check the details of your deal.
For example, Nationwide has recently upgraded some ERCs into new deals.
At the risk of adding salt to the wound, Santander has now shifted its approach to a tiered ERC for transactions made since November of last year.
These charges will be stated in the original illustration before any application is submitted and will again be specified in the formal mortgage offer.
It’s a reminder of how important it is to read the details, and the mortgage illustrations follow a standard format to try to help borrowers compare and contrast rates and fees.
It is unlikely that there is anything you can expect from trying to complain and question the impartiality of the ERCs in this case.
You say that you now need to move, which has caused the need to review the current mortgage. Most mortgages can be taken out on a new property without incurring a prepayment fee.
Lenders set early repayment fees to protect them if a borrower needs to abandon their loan before it is due.
This is often called portability and prevents an ERC from being paid when the original mortgage on the new property is held.
This will be subject to meeting the lender’s criteria for the mortgage plus any additional borrowing and is worth considering to avoid a significant penalty.
If the purchase of the new home is not simultaneous to the sale of the existing one, many lenders refund a charge when a new mortgage is taken out within a certain period, in the case of Santander within three months after the amortization of the mortgage. original (six months if moving to new construction).
Unlikely in this case, but if the current mortgage is within six months of the end of the deal, it will also offer the option to take the new mortgage on a new deal and waive any ERC.
Any additional loans will be taken out in a new agreement, so it makes sense to try to count any lock-in periods as close as possible into the two mortgage elements so that you can review the entire mortgage at the end of the agreement.
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David Hollingworth is This is Money’s Mortgage Expert and a broker at L&C Mortgages, one of Britain’s leading specialists.
He’s ready to answer your home loan questions, whether you’re buying your first home, trying to re-mortgage amid rate chaos, or looking to plan ahead.
If you have a mortgage question, please email: firstname.lastname@example.org with the subject: Mortgage Help
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David will do his best to respond to your message in a future column, but he won’t be able to reply to everyone or correspond privately with readers. Nothing in his responses constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.
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