Financial Guidance: Beware of ERCs, the hidden cost that could set you back £1000’s
When shopping for financial products, particularly on comparison websites, the easiest point of comparison is the Annual Percentage Rate (APR). But the smallest APR doesn’t always translate to being the cheapest product, especially when it comes to mortgages.
The APR of a mortgage is calculated as the annual cost of the loan including the interest charge and many of the fees that the lender may charge you. However, it won’t include items such as legal fees, the costs of a valuation or product fees that are paid up front.
Further to this, the APR calculation assumes that you will repay the mortgage over the full term you originally borrowed it, but most mortgages don’t run the full term. Typically, borrowers will hop from one mortgage product to another several times over their borrowing lives to get better rates, or more money.
The APR also ignores perhaps one of the largest, often overlooked, fees in the mortgage market – Early Repayment Charges (ERCs).
Mortgages typically carry ERCs for an initial period, usually linked to the offer. If you borrow on a five year fixed rate, you can probably expect to incur an ERC if you chose to switch products before that 5-year period ends. Rates of 5% are common and this can mean you’ll have to pay £1000’s in charges that you didn’t budget for.
For example, a fairly typical mortgage of £150,000 could cost £7,500 to exit early – on top of any other redemption costs and the costs of arranging your new finance.
Predicting the unpredictable
For these reasons, it’s important to focus on the true cost of the mortgage over the term you are likely to keep it – often a 5-year term is suggested. If you can be sure things aren’t going to change over this period, the ERC should, in theory, be a negligible cost, as you won’t need to re-mortgage before the end of this term. Often, in return for getting your custom locked in for a set period of time, you can benefit from lower rates.
The unfortunate truth is that most of us can’t really be sure what the next 5 years are actually going to bring. If you do find yourself up against hefty ERCs and therefore trapped on your current mortgage product, you’ll be pleased to know that re-mortgaging isn’t the only option when it comes to borrowing larger sums over a longer term. Using a second mortgage may be a cheaper option.
Using a second mortgage to avoid unnecessary borrowing costs
Unlike many re-mortgages, with a second mortgage you don’t have to pay any fees until you get your money. There is no upfront valuation fee, or hefty solicitors bill that is frequently more than you budgeted for! Instead there is a straightforward broker fee that only becomes payable when the loan is received – if you change your mind at anytime during the process there is no bill to pay.
On top of this you aren’t going to repay your existing first mortgage so you can keep hold of any special deal you may already have, such as a great low rate. Perhaps most importantly, you won’t have any hefty ERC’s to pay, potentially saving you thousands!
So, if you are looking at ways of raising additional money, or simply looking for a better way of borrowing, remember APR is not the only factor that will impact the total cost of borrowing. If you have any questions regarding second mortgages, call us on 0800 131 0280. Alternatively, you can find more here.