Overpaying on your mortgage or ending a fixed-rate mortgage prematurely can mean that you are surprised with an expensive early repayment charge. Fear of this leaves many people avoiding paying off their mortgage, even if they have the money to do so. But what if you could overpay without incurring early repayment charges? Here’s how you might just be able to.
Quick Overview
Overpaying on your mortgage can allow you to become debt-free earlier than you anticipated. If you think you might want to overpay on your mortgage you will have to carefully consider what type of mortgage to go for. Look out for early repayment charges when assessing your options. Avoiding these fees may mean that you have to take a higher interest rate or a variable mortgage instead of a fixed one, but it might still save you money in the long run.
What is an Early Repayment Charge?
An early repayment charge is a fee that you might incur in order to pay off your mortgage early or to pay more than you typically do each month. Doing this is called overpayment. It might seem strange that your lender charges you because aren’t you just paying them back sooner?
In reality, early repayments can cost your mortgage lender a fair amount of money because they lose out on some of the interest you would have paid. Therefore, lenders often charge you a fee for early repayment in order to compensate for this loss of interest.
They also want to encourage you to make set, regular payments and discourage you from jumping between mortgage deals as soon as a better one comes up. This is the very reason that mortgage providers offer fixed-rate mortgages with lower interest rates in the first place – to encourage you to stay with them for a fixed term.
Why Might I Want a Mortgage Without One?
You may want to find a mortgage without an early repayment charge in order to overpay your mortgage or to pay it back early in its entirety. It might be desirable for you to do so if you are expecting a lump sum of cash from a life event, such as an inheritance or a work bonus. Even small overpayments could lead to you being debt-free much earlier than anticipated.
For example, if you have a £100,000 mortgage at 5% interest over 25 years, you would be paying £584.69 per month and pay a total of £175,377 over the course of the mortgage. However, if you overpaid an extra £300 per month, your mortgage would only last 12 years and 10 months and you would repay a total of £135,479. That’s a massive saving of over £35,000.
No longer having a mortgage will free up some cash and allow you to be flexible with what you do with your home. For instance, you could rent it out and travel for a year without having to ask your mortgage provider’s permission. Fully owning your home also gives you the security that if something goes wrong, like losing your job or your partner, at least you don’t have to worry about missing mortgage payments.
Can I Get a Mortgage with No Early Repayment Charge?
It is possible to get a mortgage with no early repayment charge. But mortgages that offer this are typically variable rate mortgages. This means that you pay the price of flexibility by not being sure of the interest rate on your mortgage – since it is variable, it can go up and down at the lender’s discretion.
If mortgage rates are currently low and in a stable environment, this may not be a bad thing because you can take advantage of the market and overpay a lot. However, if the market is volatile and rising like it has been in 2023, it may be better to fix your mortgage.
Unfortunately, it is very difficult to get a fixed-term mortgage without early repayment charges because lenders prefer to know how much you are going to pay them and when. They do exist, but you will need a good credit score and a low loan-to-value ratio or a large deposit if this is your first mortgage on the property.
Note: Most lenders allow you to overpay a set amount on your fixed-rate mortgage each year without a fee. You should look into options that offer this if overpaying is important to you.
Pros of a Mortgage with No Early Repayment Charge
- Flexibility: The flexibility to overpay when you want can be very useful. It means that you can put extra cash that you obtain regularly through a bonus or fluctuating income to good use.
- Debt free earlier: Becoming free from your mortgage debt earlier than anticipated can only be a good thing. You would fully own your home and not have to worry about mortgage repayments anymore.
- Can move house: If you are thinking of moving house soon you probably don’t want to be tied down to a fixed-term mortgage. If you move home and switch to a different mortgage, this counts as paying your mortgage back early and can include a very expensive fee.
- Pay less interest: The longer you have your mortgage, the more you will typically spend on interest. If you manage to pay it back early you may end up paying less interest than initially expected.
Cons of a Mortgage with No Early Repayment Charge
- Higher interest rates: Banks don’t have the security of knowing exactly how much you will pay back and when with deals that don’t have early repayment charges. They often mitigate this by putting up interest rates. You could end up negating the financial benefit of paying your mortgage back early and actually pay more in interest overall.
- Extra admin fees: There may be hidden costs and extra admin fees for a mortgage with no early repayment charge. It’s best to check these out before applying for a deal so you don’t get any nasty surprises.
- Difficult to get: These types of mortgages are usually only available to people with a good credit score and a large amount of equity in their home already, or at least a sizable deposit if you are purchasing a new property.
- Lack of stability: If you end up taking out a variable rate mortgage in order to mitigate early repayment charges, you may suffer from the lack of stability when it comes to your repayment plan. You won’t know exactly how much you are going to pay each month because the rates can go up or down with little warning.
Types of Mortgages to Consider
There are different types of mortgages that can offer you a deal with no early repayment charges. It is worth considering all of them carefully to see which type of mortgage you want to go for and which ones you might be eligible for.
Fixed Rate Mortgage
A fixed-rate mortgage is where your interest rate (and therefore your monthly repayments) are the same for a set period of time. This is usually for at least a year. 2, 3 and 5-year fixes are also pretty common. The benefits of a fixed-rate mortgage include low-interest rates. However, they often carry hefty early repayment charges. Look for one that allows you to overpay a certain amount or to make a set number of overpayments each year without a fee.
In order to find a fixed-rate mortgage that allows you to overpay without penalty you might have to compromise by taking a higher interest rate or paying large admin fees. It is also likely that you will need a really high credit score and a very low loan-to-value ratio in order to be accepted.
Variable Rate Mortgage
The good news is that standard variable rate mortgages don’t charge fees for overpaying. However, the interest rates are usually a lot higher than the market average. You are also subject to them changing with little notice. The result of this may be that your mortgage repayments become too high for you to meet them on time and in full each month. For this reason you should only take out a standard variable rate mortgage if you give yourself a cushion for rate changes.
There are alternative variable rate mortgages to your lender’s standard offer. These provide a compromise between allowing some flexibility with early repayment in exchange for a limited amount of variability in your interest rate.
Tracker Mortgage
A tracker mortgage is a variable mortgage that changes interest rates according to the Bank of England’s interest rate. In times of a calm economy tracker mortgages are relatively stable. But when the Bank of England’s interest rate goes up or down quickly, your mortgage interest rate will do so as well.
While tracker mortgages are less strict on overpayments than fixed-rate mortgages, there may still be some limitations to how much you can overpay without incurring a charge. You also have to follow changes to the Bank of England’s base rate carefully to make sure that you aren’t hit with a sudden and very expensive interest rate. Having said this, tracker mortgages’ interest rates do fluctuate less than standard variable rates because the lender can’t change them at their discretion. Therefore they may be worth considering.
Buy to Let Mortgage
If you are a landlord you might be relieved to know that buy-to-let mortgages work differently from standard ones. Due to the fact that your income from your rental property can fluctuate depending on whether you have tenants or not, there is a high demand for buy-to-let mortgages with low or no early repayment charges. You may find that you have more options for a fixed-rate buy-to-let mortgage than one for the home you are living in.
Final Thoughts
Paying your mortgage off early can be difficult to navigate because you may incur early repayment charges that offset the financial benefits of overpaying in the first place.
However, mortgages with no early repayment charges do exist. They are just more difficult to find because lenders want to discourage you from overpaying. You may need to have a very high credit score and low loan-to-value ratio in order to be accepted. If you don’t have this, you may need to compromise with a higher or variable interest rate on your mortgage.
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