Sam Dunn: ‘Is there any chance we can avoid an early settlement fee?’

House Doctor
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The Independent Online

Question: Is there any way we can avoid an early settlement fee on our mortgage? We've come into some money and want to pay off our outstanding £42,000 repayment mortgage (with 12 years to go on it), as quickly as possible. But we signed a five-year fix with Alliance & Leicester two years ago, and will get hit with a sizeable fee. I've heard that we can avoid this with a trick: by paying off everything except £10. Is this something you would recommend? NC, Rotherham

Answer: Settling your mortgage up early is meant to bring great relief: an end to your costly current monthly outgoings; good riddance to your debts; and a chance to spend your salary or save instead of paying off a home loan.

But banks being what they are – loathe to lose you as a customer having originally counted on you repaying juicy interest on your mortgage debt for another dozen years – and in a position to claw back some of that lost income, a hefty penalty of up to £1,260 lies in wait. However, you may be able to make a cheaper early exit if your five-year fix also happens to be what's called a 'flexible' loan.

These flexible mortgages will give you much greater control, allowing you to regularly overpay; underpay; take payment 'holidays'or even borrow back money already paid.

If your Alliance & Leicester loan is also flexible, you're in luck, says Andy Montlake at broker Coreco. "With certain products, the penalties are only charged if you repay the whole mortgage amount, so in some instances you could repay down to say £1,000 without penalty."

Check the terms and conditions on your mortgage offer to see if this is the case, and if you're unsure – plenty of mortgage documents are written in turgid language – call the lender direct.

However, Richard Morea at London & Country doubts your loan will count as flexible and suggests instead you'll be limited to a 10 per cent 'penalty-free' overpayment each year instead; it also has to be made in January. "In the meantime, you could invest the money; continue to overpay by 10 per cent each January; and then redeem the mortgage once the fixed rate and penalty period ends," he says.

Another option, he adds, would be to cannily shorten your mortgage term. "Shortening the term to the minimum of 5 years will allow you to repay the capital more quickly, so saving interest." At the same time, you would still be able to overpay by 10 per cent and avoid the early settlement charge, although your lender will charge you a £25 administration fee to simply change the mortgage term.