Please note this article is for general educational purposes. You might wish to seek professional advice.
There are several reasons you may find yourself facing an early repayment charge (ERC). We’ll explain what they are, how they affect your mortgage, how much you might have to pay, and how to avoid them.
What are early repayment charges (ERC)?
Lenders most commonly charge ERCs if you repay your mortgage fully before your product period, or deal*, ends, or if you overpay by more than the agreed amount your contract allows.
*This is usually an agreed time period such as 2, 3, 5 or 10 years. This isn’t to be confused with your mortgage term (the whole length of your mortgage).
If you leave a deal early, it will affect your lenders’ financial projections. ERCs compensate them for the loss of interest they would have received if you had remained with your original deal. Some deals also have a tie in period that extends beyond the initial duration.
You may also have to pay an ERC if you overpay your mortgage by more than your terms and conditions allow. Typically, lenders let you overpay by up to 10% of either the original amount you borrowed, or your current balance, each year. Some will allow you to pay more though. Whatever the level, it’s likely you’ll have to pay an ERC if you go over it.
Your mortgage offer will include details of any ERCs you’re liable for, including the rate you’ll be charged. Some products don’t have any ERCs on them. It’s always worth reading the details or speaking to your broker or lender.
What does an early repayment charge mean on a mortgage?
You may have to pay an ERC if you redeem your mortgage while still in your current product period. For example if –
- You remortgage to another lender or complete a product switch with your current lender – maybe to achieve a more competitive rate.
- You sell up or move – and don’t need a mortgage for your new property.
- You buy a cheaper property – and retain your existing product but don’t need such a large mortgage. Some lenders will charge an ERC if you don’t retain a mortgage of a certain level.
- You move to a different property but don’t retain your existing product – and take a new product or a new mortgage with another lender instead. Or you may have sold your property, but find your purchase is delayed. Therefore, you don’t need a mortgage until you complete on your next property. For example, you sell for a favourable price but are waiting for a new build property which has been postponed . Many lenders will refund ERCs if you take another mortgage with them within a certain timeframe. Check your terms and conditions to make sure you know where you stand if you think this will affect you though.
- You make overpayments above the agreed amount – this is usually set at 10% of your original or current outstanding loan amount per year. However, it can be higher.
How is an early repayment charge calculated?
ERCs are generally calculated as a percentage of the original or outstanding value of your mortgage. They typically range from 1% to 5% if you repay the full balance.
Making higher overpayments than your mortgage allows can also result in an ERC. This may be based on a percentage of the additional amount you repay. Alternatively, it may be based on value of the overall overpayment balance in a specific time period.
Can I avoid an early repayment charge?
With a bit of planning, you could avoid having to pay an ERC. In fact, some mortgages don’t charge ERCs at all. These tend to be standard variable rate (SVR), tracker, or discounted products. Variable rates tend to be lower than fixed rates initially. However, their interest rates fluctuate, so they may surpass fixed rates in the future. You also won’t have the security of knowing how much you’ll need to pay each month.
If your mortgage does include ERCs you could avoid them by:
- Remortgaging or switching to a new product when your current one ends, or as soon after as possible.
- Make sure you don’t exceed your agreed overpayment limit.
- If you’re moving home, rather than taking a new mortgage deal, enquire with your lender to see if it’s possible to port your existing product to your new property. Not all products are portable, and some may require meeting certain lending criteria.
If you decide to pay an ERC to overpay or move to a cheaper deal, ensure that the savings you’ll make will exceed the fee you pay, or that doing so helps meet your overall financial objectives.
In general, the most cost effective option is to wait until your ERC period expires. If you plan ahead, you can try to make sure you move to a new deal when your current one ends.
As ever, we recommend speaking to a qualified mortgage adviser before you make any decisions. They’ll be able to explain everything to you and help you work out if paying an ERC to achieve a lower rate, or keeping your current product would be more beneficial.
