I’m 4 years into a 5-year mortgage and need to move but Santander is charging a 5% penalty – what can I do? DAVID HOLLINGWORTH replies

I took out a five year fixed rate mortgage with Santander four years ago. My circumstances have changed and now I have to move.

While I knew there was an exit fee for early termination, I didn’t realize that the payment doesn’t decrease over time like other mortgages.

Instead, the fine remains fixed at 5 percent until the end of the specified term. I know it’s clearly stated in the fine print, but I’m surprised and it seems very unfair to me.

Is this reasonable and is there anything I can do about it? Via email.

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David Hollingworth replies: Prepayment charges (ERCs) are a very important element to consider when selecting a mortgage agreement.

It is generally better to try to enter into a mortgage agreement with no expectation that it will be necessary to amend or repay the mortgage in full, which could incur a penalty.

However, life will always throw us unexpected things, which can mean that ERCs can become a bigger problem than expected.

Prepayment fees are there to protect the lender from borrowers paying off the mortgage and leaving them with money they can no longer lend at the same rate.

For example, if a borrower enters into a firm deal, the lender priced that deal based on the cost of borrowing plus any margin at the time.

If interest rates then fall and the borrower pays off the loan to take advantage of a lower interest rate, this could leave the lender with funds that it will no longer be able to lend at the required price and, in effect, be unable to close the deal .

Consequently, lenders apply an ERC to effectively bind the borrower and at least make sure they are compensated if they leave.

ERCs are generally expressed as a percentage of the amount repaid and can easily be in the range of 3 to 5 percent of the mortgage, sometimes more.

As you noticed, many lenders have an ERC structure where the fees are higher at the beginning of the mortgage and gradually decrease over time.

For example, that could mean a five-year deal charges 5 percent in year one, drops to 4 percent in year two, and 3 percent, 2 percent, 1 percent for each remaining year. HSBC is even reducing the amount due day by day.

Santander is a lender that has historically charged a fixed ERC throughout the deal period, which was typically 3 percent for a two-year product or 5 percent for a five-year fixed-term deal.

It will also recoup any benefit package that may have applied to the original deal, such as a cashback.

Lenders can change their approach, so it’s always important to check the details of your deal.

For example, Nationwide recently gave some ERCs a head start on new deals.

At the risk of rubbing salt in the wound, Santander has now shifted its approach to a tiered ERC for deals closed since last November.

These costs are shown in the original image before an application is submitted and are re-specified in the formal mortgage quote.

It is a reminder of how important it is to read the details and mortgage illustrations in a standard format to help borrowers compare and compare fees and charges.

It is unlikely that you can expect anything by trying to complain and challenge the fairness of the ERCs in this case.

You indicate that you now have to move, which means that the current mortgage must be revised. Most mortgages can be transferred to a new home without a prepayment surcharge.

Often referred to as porting, this prevents an ERC from being paid maintaining the original mortgage on the new property.

This is subject to meeting the lender’s criteria for the mortgage plus any additional loans and is worth considering to avoid a hefty fine.

If the purchase of the new home does not coincide with the sale of the existing home, many lenders make a repayment when a new mortgage is taken out within a certain time frame, in the case of Santander within three months of the original mortgage being paid off ( six months when moving to a new building).

Unlikely in this case, but if the current mortgage is due within six months of the end of the deal, it also offers the option of taking the new mortgage on a new deal and waiving any ERC.

Each additional loan will be included in a new deal, so it makes sense to match each lock-in period as closely as possible to the two elements of the mortgage so that you can view the entire mortgage at the end of the deal.