Reducing early repayment charge

Goldust · 9 February 2018 at 2:59PM

Hi,

I've read a few other threads on these but they're quite old now. General consensus is it's what I agreed to and I accept that but I'll explain my situation to see if there's anything I can do to reduce the overall impact.

I signed up to a 5 year fix with Post Office mortgages in early 2014 so the rate expires in around a year from now. I thought (wrongly) that the 5% ERC reduced by 1% each year but it doesn't. Again, my fault - I did most of the work myself and I didn't go back to check this so nothing I can do there.

I am looking at moving overseas and I don't want the hassle of maintaining or renting my house here so would prefer to sell.

As I'm now in the final year, is there anything I can do? I thought the ERCs were supposed to be fair compensation for the loss the mortgage provider makes on me settling early. But I don't understand how that value can be the same pretty much in the final year as it is in the first year. Or am I wasting my time? I don't really know how to approach the situation or just suck it up and either lose 5% or delay my plans to move for a whole year if I can....

I will ring them up and see but wanted to arm myself with anything that might help before I do so.

My interest rate if it helps is 3.2%. So 5% penalty now would be more than the interest I would pay over the remaining fixed rate term.

Thrugelmir · 9 February 2018 at 3:18PM

Goldust wrote: »

I thought the ERCs were supposed to be fair compensation for the loss the mortgage provider makes on me settling early.

No need to be fair. Lenders will set the penalty at a level to discourage people from reedeming early. As costs them money to do so.

You'd complain soon enough if the lender wished to break the contract by increasing interest rates.

kingstreet · 9 February 2018 at 3:47PM

Goldust wrote: »

As I'm now in the final year, is there anything I can do? I thought the ERCs were supposed to be fair compensation for the loss the mortgage provider makes on me settling early

No. It is to compensate the market counterparty which agreed to those terms to provide the rate swap to provide the fixed rate funds in the first place.

It is a simply £x until DD/MM/YYYY and there is no grey area.

A tapering ERC 5/4/3/2/1 for example would have resulted in a higher rate being offered.

pjcox2005 · 9 February 2018 at 3:55PM

Potential you could look at what level of overpayment you can make to reduce the penalty should you have the funds.

Goldust · 23 July 2018 at 1:53PM

Hi everyone - bumping my own thread for a little bit more advice here.

I've still got this rate and have confirmed it ends on 31st March 2019. So to pay 5% between now and then just isn't worth it and we are considering moving in with my parents to save for 6-12 months anyway once we sell.

I'm sure I know the answer and aware it's a daft question but I presume I can put my house on the market any time between now and then as long as I specify that the sale does not go through until 31st March at the earliest.

I guess that causes separate issues in terms of timing for a potential buyer so once I know the situation I can ask what is appropriate in the house buying and selling forums...

kingstreet · 23 July 2018 at 1:57PM

Yes. You can market when you like but you won't be able to complete to avoid the ERC until the ERC ends, so earliest date will be 01/04/2019.

sparkey1 · 23 July 2018 at 3:08PM

A few things to think about.

1. Some mortgages allow you to repay up to 10 per cent per year without penalty.

2. Some ERCs are calculated on the start or year balance, whereas others are calculated on the balance on the day you pay it off.

3. Check the year end. Some repayment dates are 31 Dec, others may be set differently. If for example Post offices had a year end of 31 July, it could be that you pay 10% before 31st July, and another 10 % thereafter. THus your balance would be 20% lower, and your ERC might be 20% lower if it is calculated on the last daily balance.

Goldust · 23 July 2018 at 3:46PM

sparkey1 wrote: »

A few things to think about.

1. Some mortgages allow you to repay up to 10 per cent per year without penalty.

2. Some ERCs are calculated on the start or year balance, whereas others are calculated on the balance on the day you pay it off.

3. Check the year end. Some repayment dates are 31 Dec, others may be set differently. If for example Post offices had a year end of 31 July, it could be that you pay 10% before 31st July, and another 10 % thereafter. THus your balance would be 20% lower, and your ERC might be 20% lower if it is calculated on the last daily balance.

1 - It's calculated annually and I can overpay by 10%. I've never overpaid previously

2 - it's calculated on the day of settlement

3 - Year end is 31st March which also is the date that the ERP ceases to be applied. I think I took it out around that date anyway although it does appear that they have rolled the ERC end date to the end of that month anyway

Maybe it's a bit more helpful if I give some figures.

- The house is tentatively valued at around £160k
- I will owe around £90k on the mortgage by the time the ERC ceases
- Between now and then, the balance won't change greatly due to interest but I'd say without looking (as they don't have an online account service) it's maybe £92k

So unless my house depreciates by around £4,500 in the next 8 months it's not worth even considering selling sooner.

I don't have much cash reserves but what little I have could be spent making the house a bit nicer to a buyer in that time I suppose. I'm a bit trapped now and the longer I've lived with my decision to take out this rate, the more prohibitive it's become to even think about trying to get out of it earlier.

Reducing early repayment charge

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