Early Repayment Charge

dan_laura

Hi All,

We are looking to move home ASAP, the problem we have is that our mortgage has an ERC attached to the fixed term. This term ends on 30-6-14. We would like to be moving march/april time. The coventry who manage our mortgage say that we have a 4% fee for ending the mortgage early. I totally understand why these fee's exist and i am happy to pay an amount but i find 4% with only 3months remaining on the fixed term a bit excessive. Basically They want us to pay £3000 if we end the mortgage before 30-6-14 but we only pay £450pm month for our mortgage. so if we move in march as we hope that would leave only 3 payments on our mortgage totaling £1350. So i would like to know if anyone can help answer, i dont really feel this £3000 as it is calculated as a % of the remaining balance is fair. As a genuine loss to the company of me repaying early how can this genuine loss me more than they will receive in payments from me until the fixed term ends? especially as the mortgage is a capital repayment so a portion of that £1350 will be paying off capital. Any advice will be well received.

Thanks
Dan

ethank

A lender might offer certain rates on the basis that it will be able to recoup a discounted rate by keeping your business. But if you leave early, the lender may incur a loss. This is why they charge these Early Repayment Charge fees. They want to know that they will not lose money on you.

You have not given us details of your LTV or the % on your mortgage, but there is a reason your are being tied in. It is not calculated on remaining payments, it is calculated based upon the length of your mortgage.

The provider would have to be upfront about these charges, and so it is a term & condition of your mortgage. You have zero % chance of having this Early Repayment Clause removed, so you need to think of other options.

I had one with ING Direct/Barclays - and I delayed my completion to get out of paying it.

Thrugelmir

The contract terms were very clear and specific at the outset. You agreed and signed up to them so have no grounds for complaint.

However it should be possible to port this mortgage across to your new property. Then top with an additional new product for the balance.

dan_laura

there is approx 68k left on the mortgage and 18 years the LTV is just under 40% and the interest rate is 4.5%
i am obviously missing something but if in 4 months time they are not seeking a loss how can they be covering a loss of greater than the value of my payments i have to make before that point?

dunstonh

I totally understand why these fee's exist and i am happy to pay an amount but i find 4% with only 3months remaining on the fixed term a bit excessive.

How do you know it is excessive without knowing the terms that bank would have to pay the investors/money markets for breaking their terms?

You have zero % chance of having this Early Repayment Clause removed, so you need to think of other options.

I wouldnt say zero. Whilst the bank has done nothing wrong and there are valid reasons for the ERC. Within the last month or two, there is potential for the bank to take a decision. Probably behind the scenes they would fund the gap from their own funds to avoid repaying the investors. It would create a cost but not as big and if the person was applying for a new mortgage, they may waive it. Doesnt happen often and requires a lot of goodwill but it has been done. Single digit odds I would put it at.

Thrugelmir

dan_laura wrote: »

there is approx 68k left on the mortgage and 18 years the LTV is just under 40% and the interest rate is 4.5%
i am obviously missing something but if in 4 months time they are not seeking a loss how can they be covering a loss of greater than the value of my payments i have to make before that point?

Let's turn the situation around. The lender wants to increase the interest rate rate to 6% for the remainder of the term. What would be your reaction?

The point you are missing is that a contract is a legal document. Neither party can vary the terms and conditions at will. Because their personal circumstances have changed. The contract is binding.

In a polite sense, the lenders business is none of yours. Lenders advance money to make a profit. Why should they give that profit away because you failed to follow the terms of the contract you signed.

opinions4u

Don't sign up for something if you think the terms are "a bit excessive".

Seriously, they told you the terms. You signed up. End of story.

dan_laura

Thrugelmir wrote: »

Let's turn the situation around. The lender wants to increase the interest rate rate to 6% for the remainder of the term. What would be your reaction?

The point you are missing is that a contract is a legal document. Neither party can vary the terms and conditions at will. Because their personal circumstances have changed. The contract is binding.

In a polite sense, the lenders business is none of yours. Lenders advance money to make a profit. Why should they give that profit away because you failed to follow the terms of the contract you signed.

I think your the person missing the point here!

What i am saying in relation to you and other comments is that i understand the reason behind giving these charges etc. I understand that contracts are a legally binding document. But what i also know is that an early repayment charge has to be a genuine loss that the lender may encounter. If as a previous poster mentioned we dont know the penalty they might incur on the money they borrowed to borrow me thats fine, although their rules state they should tell me the basis on which it is calculated. My understanding of that is if they are receiving a penalty from their lender that should be explained to me.
Again in relation to another post up here about they might fund the repayments for a short space of time to avoid their own penalty i fail to see why now with a total repayment of £1400 for the remaining months where 35% of that is capital repayments how can my charge be fair at £3k. Thats all i am asking mate. Im not asking for you to reply with an answer that suggests people are less intellectual than yourself. Just purely asking a question and asking if anyone could explain why. Which some people have!

dan_laura

opinions4u wrote: »

Don't sign up for something if you think the terms are "a bit excessive".

Seriously, they told you the terms. You signed up. End of story.

I didnt sign up to something where i believe the terms to be excessive. At the point of taking out the mortgage i didn't expect to move within the 5 year term. But the requirement for a bigger property can come from nowhere. In the 5 years the capital has reduced from 75,000 to 68,000 based off the fact it is a % the early repayment charge hasn't really changed barring a few hundred quid. If your best explanation as to these charges is the answer you gave your probably not worth anyones time on this forum

dan_laura

5.00% of the balance repaid until
31.03.16, then 3.00% until 31.03.18,
then 1.00% until 31.03.19
You can repay up to 10% of the capital
p.a. without an early repayment charge.

this is also now the terms of which the same building society offer their fixed terms. So i think from the changes they have made and the fact as you get closer to the end of your tern the % charge reduces because obviously they have offset a lot of their losses. I think although these changes occurred shortly after i took out my fixed term it shows that even the bank felt they needed to make their terms more fair. So to me that would suggest mine are excessive.

kingstreet

Apply for your new mortgage with Coventry and port the current rate to the equivalent amount, hence leaving no ERP to pay.

Take the increased borrowing on one of Coventry's current products.

When the current rate ends, ask them for a customer retention product on that sub-account.

Charges are levied to reimburse the market counterparty which funded the fixed rate, either retail savers, or money market investors. The lender has no flexibility to negotiate with them and has the same flexibility with you.

The lender tries to obtain the best terms it can, to make it more competetive. A higher rate may have had easier ERPs. Unfortunately, only the borrower can factor-in what changes in circumstances he/she may encounter during the life of their mortgage product.