Money Insider: Ignore the mortgage ERC at your peril
Saturday 02 April 2011
Choosing the right mortgage can be a complex process, we all have different circumstances so unfortunately it will never be a case of one type of home loan fits all.
The majority of us who opt for a discounted or fixed-rate mortgage will naturally focus on the interest rate and fee as we look to keep the upfront costs and ongoing monthly repayments to a minimum.
However, recent Moneynet research highlights that it is equally important to check the costs of terminating your mortgage deal ahead of schedule, not something that you're really contemplating when you sign up for your new mortgage, but a very important one, particularly when you realise potential cost implications.
An early repayment charge (ERC) will be detailed in your mortgage agreement and will tell you how much of a financial penalty you would have to pay to get out of your deal before you reach the agreed maturity date.
If you look at the five-year fixed-rate products currently available as an example, many lenders will charge you 5 per cent of your mortgage balance to exit the deal in the first year, but in reality this is something you're quite unlikely to want to do.
The situation is different when you get to the last 18 months or so of your mortgage as you'll be taking more notice of the prevailing interest rates and starting to consider your options for when your current deal finishes.
This is where the difference in ERC charges is important, as in the final year in a five-year fixed deal, some lenders such as HSBC, The Co-operative Bank and Britannia will only charge 1 per cent of your balance as a get-out fee, while Northern Rock charges 4 per cent and Santander, Post Office and Nationwide are among those that will still require a hefty 5 per cent.
To give you an idea of the cost differential, someone with a £160,000 mortgage having to stump up a 5 per cent exit penalty would be faced with an eye-watering bill of £8,000 compared with a far more palatable £1,600 payable to a lender charging just 1 per cent.
For those with a smaller loan the costs will not be as great, however, the potential savings of moving to a lower rate will be smaller too, so the size of the ERC is still an important factor.
It's understandable for lenders to impose a high ERC at the beginning of a fixed mortgage, but to impose such steep fees in the final year of the deal is excessive and makes it highly unlikely that you would be better off switching to a new deal, even if it was at a considerably lower rate.
At the moment there will be people getting itchy feet as they see competitive 5-year deals, wishing they could move, but restricted by the high get-out costs. Next time you're in the market for a new fixed or discounted mortgage, don't be swayed purely by the headline rate and product fee, if there's a sizeable exit fee payable in the final year or so of the deal, it may be worth paying slightly more each month just to buy yourself some additional flexibility further down the line.
Which challenges card fees 'profiteering'
i'm sure I'm not the only one to have been a bit miffed by excessive charges imposed by websites for using a debit or credit card, and while I appreciate there are costs to the providers, these often bear little resemblance to sums being charged to the consumer, and in many cases appear little more than blatant profiteering.
It was therefore heartening to see that consumer champion Which? this week submitted a super- complaint to the Office of Fair Trading (OFT) in an attempt to put a stop to this unfair practice. As plastic increasingly becomes the most favoured and secure method of payment, it's only right that consumers should be protected against retailers who are charging many times the processing costs.
Websites should make their card charges clear at the outset, and not sneak them in at the very end of the purchase process, hoping that the customer, rather than choosing to shop elsewhere, will just cough up anyway.
Whether it's a ticket for the cinema, a train journey, or air fare, charging cost price for the transaction is fair enough, but the extortionate fees and percentage fees charged by some firms needs to be stamped out before it becomes the norm.
Let's hope the OFT stamps out this excessive charging once and for all.
Andrew Hagger is a money analyst at Moneynet.co.uk
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