Should I overpay my £41,000 mortgage despite early repayment charges? DAVID HOLINGWORTH replies

In February this year I switched to a two-year fixed rate mortgage at 5.54 per cent with Nationwide. I currently still have €41,000 to pay.

My father very kindly offered me £20,000 to pay off part of the mortgage to reduce my costs.

I know I will have to pay some fees for this, as I can only overpay 10 percent of the balance each year before the early repayment fees kick in.

Would I be better off paying off the €20,000, paying the costs and continuing with the existing mortgage? Or would it make more sense to take out a new mortgage early, look for a new lender and perhaps get a better interest rate for the remainder of the term?

There may be a better option that I haven’t thought of, but any guidance would be greatly appreciated.

David Hollingworth replies: Many borrowers like the idea of ​​a fixed interest rate so they know exactly where they stand with their monthly budgeting. The potential downside is that the lender generally expects you to honor the deal.

Lenders will determine their rates based on market rates and the cost of funds at the time.

Therefore, to protect their interests, they charged an early repayment fee. That acts as a penalty for those who pay off early, covering the potential costs to the lender.

Overpaying your mortgage

Lenders recognize that borrowers want some flexibility to overpay and reduce the mortgage balance more quickly if possible.

As a result, most flat rates will allow a certain level of overpayments each year without any penalty.

Most lenders typically offer up to 10 percent per year without charging an ERC, and some lenders can be more generous than that.

Most lenders base the 10 percent on the outstanding balance at the time you repay, but your lender Nationwide bases the 10 percent on the initial balance at the beginning of the fixed-rate period. This allows you to pay back a little more than 10 percent of £41,000.

Your annual allowance should also reset again in February, which could give you the chance to take another 10 percent off the original balance in a few months.

You may want to clarify the exact times that apply to Nationwide.

How do early repayment fees work?

There are a number of elements to balance before deciding how to proceed. The first thing you should do is check what exactly the ERC is for your specific deal.

Depending on when you closed the deal, this could affect the amount of costs you face.

Nationwide reduced some of the ERCs applicable to the mortgages towards the end of 2023, potentially coinciding with securing the deal before your existing deal expired.

Nationwide also typically reduces the percentage it charges as the flat rate expires each year.

That means the fine level could drop in February, potentially saving the equivalent of 0.5-1 percent on the fine – depending on the terms of the deal.

So, waiting a few months can keep the penalty to a minimum if you decide to pay off the entire amount at once.

Do you have to pay an early repayment fee?

When deciding whether to undergo an ERC, the usual approach is to see if the reduction in your monthly payments will offset the cost of the penalty over the remaining lock-in period.

Transferring the remainder of the mortgage to a better rate can help limit penalty costs for the remainder of the fixed period.

However, your mortgage is relatively small, so you need to be careful when looking at a new deal and handle those amounts carefully.

Fees should be avoided as they can potentially take away much of the savings you can make by getting a better rate.

Take a look around the market, but if you want to take out a new mortgage with a new lender, you usually need a minimum mortgage amount of € 25,000.

It’s worth noting that Nationwide offers borrowers the option to switch to a new deal without an ERC in the last three months of their current deal, allowing you to break away from the current higher rate sooner.

Savings interest

In addition to considering how much you can save on mortgage interest, you should also consider what you could earn from any cash savings – if only you overpaid with the ERC-free overpayment allowance and put the rest of the money aside . instead of.

One-year fixed-rate bonds can currently pay 4.8 percent. That is lower than the mortgage interest, but there is no penalty.

Also take into account whether you may have to pay tax on any savings interest, should this exceed the personal savings allowance.

Although the ERC will be in the hundreds and not thousands, I still think it could be difficult to pay for it, once you take advantage of the two annual overpayment allowances, the current savings rate – and take it into account It is assumed that you may be able to switch to a lower interest rate a little earlier.