Mortgage Early Repayment Charges

[JimJammer]

It looks like I am buying a house. I have the choice between 2 mortgages of £210,000

- 5 year fixed interest rate of 2.45% with a £1000 fee and no Early Repayment Charges
- 5 year fixed interest rate of 1.84% with a £1000 fee and Early Repayment Charges of

-5% in year 1
-4% in year 2
-3% in year 3
-2% in year 4
-1% in year 5


The monthly cost is £712 and £776 respectively. Wife thinks I'm mad for even considering the no ERC option because we don't intend to leave the house for 10 years. I on the other hand am thinking that plans can always change. From a pure odds based calculation I think the no ERC option is probably overpriced, but I just feel more comfortable with the added optionality.

What are your thoughts? should I let it go and just except that if things change I might just have to suck up some extra costs?

[zolotiyeruki]

Keep in mind that, for comparison purposes, the early prepayment penalty is 0.61% lower than the stated amounts, since your interest is that much lower.  Sure, anything can happen in the next few years.  But that extra interest stacks up pretty quick.  At the end of year 5, you'd have paid roughly 6kEUR in extra interest to avoid 10k, 8k, 6k, 4k, or 2k in penalties.

If you're in a stable job in a stable industry, I'd say save on the interest costs.

[ericrugiero]

As pointed out above, the interest savings is significant.  The break even point should be somewhere around 3.5 years.  After that, you have saved enough interest to pay the early repayment fee.  If you think it's very likely you will stay more than 3.5 years I would go with the lower interest and risk the early repayment charges. 

[JimJammer]

I think you have a point. I've ran some more numbers and the more i think about it the 'insurance' offered by the no ERC option looks really overpriced.