Paying off your mortgage early can be a great financial move, but what happens when early repayment charges (ERCs) come into play? For borrowers like you with a £41,000 mortgage balance and a generous offer of £20,000 to help clear the debt, the decision can be complex. Should you overpay, pay the fee, or consider remortgaging?
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In this detailed guide, mortgage expert David Hollingworth explains your options and helps you make the best financial choice.
Overpayments and Early Repayment Charges: The Basics
Most fixed-rate mortgages offer flexibility by allowing borrowers to overpay up to 10% of the mortgage balance per year without penalties. However, anything above that 10% threshold will trigger an early repayment charge (ERC), which is typically a percentage of the outstanding balance.
Your Lender: Nationwide’s Policy
- 10% Allowance: Nationwide calculates the 10% limit based on the original loan balance at the start of the fixed-rate term, not the current balance. This may allow you to overpay slightly more than 10% of your current £41,000 loan.
- Reset in February: Your annual overpayment allowance resets in February, meaning you can make another significant overpayment within just a few months.
Understanding Early Repayment Charges (ERCs)
ERCs act as penalties for borrowers who pay off fixed-rate mortgages early. The exact percentage depends on your mortgage terms and how long you’ve been in the deal.
Key Points to Consider:
- Reduced ERCs Over Time: Nationwide typically reduces the penalty percentage as each year of the fixed term passes. Waiting until February may decrease the ERC by 0.5%–1%, depending on your deal.
- Exact Penalty: Clarify with Nationwide the current ERC applicable to your mortgage.
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Should You Overpay and Pay the Fee?
To determine if overpaying is worthwhile despite the fee, you’ll need to weigh:
- Interest Savings: Reducing your mortgage balance means paying less interest over the remaining term.
- Cost of ERC: Compare the savings from reduced interest with the upfront cost of the early repayment penalty.
Alternative Options to Consider
1. Split Overpayments Over Two Allowances
Since your overpayment allowance resets in February, you could:
- Overpay £4,100 now (10% of the original balance, if applicable).
- Overpay another 10% in February without incurring penalties.
This approach allows you to reduce the mortgage balance significantly without triggering an ERC.
2. Remortgage to a Better Deal
If your current rate is high, remortgaging could save you money over the long term. However, with a mortgage balance of £41,000:
- Minimum Loan Amounts: Many lenders require a minimum loan of £25,000, which you’d meet after using part of the £20,000 gift.
- Fees and Costs: Be cautious of arrangement fees, as they could erode potential savings.
Nationwide allows borrowers to switch to a new deal three months before the current term ends without an ERC. If your deal ends soon, you might want to explore this option instead of paying a penalty now.
3. Save the Money Instead
If the ERC is too high to justify immediate repayment, you could deposit the £20,000 into a high-interest savings account.
- Current Savings Rates: One-year fixed savings bonds offer rates around 4.8%.
- Mortgage Rate Comparison: While this is likely lower than your mortgage interest rate, it avoids the ERC entirely.
- Tax Considerations: Be mindful of tax on interest if it exceeds your personal savings allowance.
How to Make the Right Decision
Here’s a step-by-step guide to determine your best course of action:
- Check the Exact ERC: Contact Nationwide for your current penalty terms and the date it decreases (if applicable).
- Use Overpayment Allowances: Maximize your penalty-free allowance now and again in February.
- Compare Savings Options: Weigh mortgage interest savings against the cost of the ERC and potential returns from savings accounts.
- Explore Remortgaging: If your deal is near the end, consider switching to a lower rate with minimal fees.
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Key Takeaways for Borrowers
- Overpaying your mortgage can be a smart move but must be balanced against early repayment charges.
- Take advantage of Nationwide’s 10% annual overpayment allowance and the February reset to minimize penalties.
- Carefully calculate whether paying the ERC upfront is worth the long-term interest savings.
- Explore remortgaging or saving options if immediate overpayment isn’t optimal.
Final Advice: With a relatively small mortgage balance, every decision matters. Use overpayment allowances strategically, clarify your ERC with Nationwide, and carefully compare the costs and benefits. A well-planned approach can help you make the most of your £20,000 and reduce your mortgage burden efficiently.
If you’re still unsure, consult a mortgage broker for personalized advice tailored to your financial circumstances.
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