5 year term/2 year fix - ERC's after fix ends??

Milothe

Can you please help to settle a debate between Mr Milothe and I? It's been a while since we took out a mortgage, and I know there’s been a lot of changes since the introduction of MMR.

We have managed to get an AIP with Leeds to remortgage our main home to purchase a second home on an interest only basis using Mr M’s TFLS as the repayment vehicle. We are looking at taking out a 5 year term, with a 2 year fix at 2.25%. I understand that if we were to pay off the mortgage within the 2 year fix period, we would be subject to ERC costs – Leeds website states these are on a tiered basis, so don’t know exactly what the penalties would be yet.

However, if we waited until the 2 year fix ends and pay off the mortgage then, would there be ERC costs applicable? I know there would be redemption fees to close the mortgage and transfer the deeds etc, but surely we would not be liable for ERC charges? Mr M thinks we would still incur these…so who is correct?

I know there will likely be variable circumstances between lenders, but just as general guide, is my interpretation correct?

I have tried to call my contact at the Leeds to ask them direct, but he’s not called me back…

David_White

After the fixed rate ends you would typically go onto a lenders Standard Variable Rate at which point you should be able to repay the mortgage in full with no ERC.

Milothe

Thanks David White, that’s what I thought.

I’ve since spoken to the Leeds since my last post and they advise that they don’t do short term lending, the minimum term is 5 years and if I was going to pay off the mortgage after the end of the fix, then they would withdraw the offer!!

This is not our intention – we plan to run the mortgage to end of term, but we’d just like to know what our options are – circumstances can change at any time, so want to be clear what we are getting into. We’d like to know that we have the flexibility to potentially pay off early after the fix ends without additional penalty.

ViolaLass

Milothe wrote: »

if I was going to pay off the mortgage after the end of the fix, then they would withdraw the offer!!

So don't tell them of that intention (whether you have it or not).

Milothe

I didn't tell them - it was just a hypothetical question posed to the Leeds, but they soon put me in my place!

AnotherJoe

David_White wrote: »

After the fixed rate ends you would typically go onto a lenders Standard Variable Rate at which point you should be able to repay the mortgage in full with no ERC.

Agreed, though if you intend to go the full 5 years, you'd likely be better off taking a 2 or 3 year fix at that 2 year point, even extending it to a 5 year term if need be to get those rates (obviously not telling them you intend to pay it off at the end of the new fix period.)

ViolaLass

Milothe wrote: »

I didn't tell them - it was just a hypothetical question posed to the Leeds, but they soon put me in my place!

Not really. They have no way of knowing your plans if you don't tell them and they can't hold you any promise that you won't pay the whole thing off after two years.

Milothe

Thanks everyone for your comments. I’ve been crunching some numbers and if, my calculations are correct, hypothetically if our intention was to pay off early, we’d be better doing it within the 2 year fix period:

e.g mortgage amount £112000 on 2 yr fix at 2.25% IO
Monthly payment approx. £210 per month
Total payments after year 1 = £2520

ERC is 3% of balance in yr 1 of fix, 2% in year 2 of fix i.e £112000 x 2% = £2240

So if we were to pay interest for the full two years, we’d pay approx. £5040 in interest, however if we paid off at the end of year 1, we’d only pay £4760 (1 year at £210=£2520 plus ERC 2% £2240). Plus the mortgage redemption fees, etc., that would need to be paid any way if the mortgage was settled early.

Is my thought process correct? I’m sure you’ll tell me if I’ve overlooked something glaringly obvious!

ViolaLass

If you can pay it off after a year, why not wait a year and buy cash?

Milothe

To be honest,Viola that would be the best option. However, we really like this house and don't think the vendors will wait for a year or two, while we get our act together 😞 hence looking at this as an option.

ViolaLass

Fair enough. Do you need to fix at all? Over such a short period, interest rate would have to do crazy things to bother you and you could avoid ERCs.