I generally consider myself a financially savvy individual.
I switch energy deals reasonably often, I own a current account that suits my financial needs and I pay no interest on credit card debt on the occasions that I have any.
I also happen to write and edit articles about being financially savvy, which has helped me run a fairly tight ship.
But I’ve recently discovered that I committed a monumentally stupid mistake that’s going to land me with an eye-watering £5,000-plus bill from Nationwide.
So I thought I’d write about it as a cautionary tale highlighting how easily it can happen if you aren’t paying attention.
Here’s what’s happened
Without going into too much detail about my personal life, I need to sell my property now and close the mortgage account.
There is no other way around my current situation.
I’m currently coming towards the end of a five-year fixed-rate mortgage, which is due to expire early next year.
However, because I’m still within that five-year window, I’ll have to pay Nationwide what’s known as an Early Repayment Charge, or ERC.
How ERCs work
As the name implies, it’s a penalty you pay if you clear your mortgage during the fixed-term portion of a deal.
It’s usually set as a percentage of the amount you owe and lets the lender ensure it can cover any costs incurred and make some money regardless.
I was well aware I’d need to pay this, but only recently did I realise just how big that payment would be.
What I did wrong
There are effectively two types of ERCs.
The first, and more common, one is a tiered system whereby the percentage you repay reduces as you near the end of your fixed-rate period.
For example, with a five-year fixed-rate mortgage you may need to pay an ERC of 5% in the first year, 4% in the second year, and so on until 1% in the fifth year.
The second, less common, ERC is where you're charged a percentage of the total amount outstanding regardless of where you are in your fixed-term.
This means the penalty you pay hardly reduces at all from year to year.
And that’s the one I am facing.
When signing the contract, I had noted the hefty ERC of 5% but then failed to read through the specifics.
To be clear, I would not have chosen a deal charging a percentage of the loan as I knew this could leave me vulnerable to exactly the situation I now find myself in.
Making no excuses
I could rattle off a host of reasons about why I failed to spot this key information.
I had a lot going on at the time I signed the contract… most deals offer tiered ERCs... Nationwide has a reputation for being one of the friendlier lenders out there so I didn’t need to worry about it…
But the truth is I failed to read through the charges, signed the document, and I am now quite rightly paying the price.
Well over £5,000, in case you were wondering.
What am I doing about it?
Aside from kicking myself repeatedly, I have taken steps to reduce the amount I will be charged by making the maximum overpayment allowed this year (10%), which will at least save me a few hundred quid when it comes time to pay the charge.
Of course, this doesn’t actually change the fact that, had I simply taken the time to examine the type of ERC at the time, I could have saved myself a small fortune by choosing a different deal.
It was a stupid mistake and one that I will use as a rather expensive lesson in the importance of reading documents thoroughly before signing.
To be honest, it’s an embarrassing situation for me to find myself in, being a financial journalist and all that.
But I wanted to stress the importance of clearly understanding charges and considering how you might be affected not just today, but years in the future should your financial situation change.