An Early Repayment Charge (ERC) is a fee that a mortgage lender may charge if you repay some or all of your mortgage early.
It can also apply if you change your mortgage before a deal ends.
ERCs are common with fixed-rate mortgages. However, they can also apply to other mortgage deals.
The charge can be large. Therefore, it is important to understand the rules before taking out a mortgage.
What Is an Early Repayment Charge?
When you choose a mortgage deal, you may agree to keep it for a set period.
For example, you might choose a five-year fixed-rate mortgage.
If you leave the deal before those five years are over, the lender may charge an ERC.
The charge may apply if you:
- repay the mortgage in full
- remortgage to another lender
- make a large overpayment
- sell your home and repay the mortgage
- change mortgage deal early
However, the exact rules depend on your mortgage.
Why Do Lenders Have Early Repayment Charges?
A lender may offer you a particular rate for an agreed period.
It expects the mortgage to remain in place during that time.
If you repay it early, the lender may lose some of the interest it expected to receive.
An ERC can help cover the lender’s costs.
How Much Is an Early Repayment Charge?
ERCs are often based on a percentage of your mortgage balance.
For example:
Mortgage balance: £200,000
ERC: 2%
The charge would be:
£200,000 × 2% = £4,000
Therefore, even a small percentage can result in a large charge.
Another ERC Example
Suppose your mortgage balance is:
£150,000
Your ERC is:
3%
The charge could be:
£150,000 × 3% = £4,500
Therefore, check the actual cost before repaying or changing your mortgage.
Do ERCs Reduce Over Time?
Sometimes.
For example, a five-year mortgage deal could have an ERC that falls each year.
It might look something like this:
| Year | Example ERC |
|---|---|
| Year 1 | 5% |
| Year 2 | 4% |
| Year 3 | 3% |
| Year 4 | 2% |
| Year 5 | 1% |
This is only an example.
Some mortgages use a different structure. Others may charge the same percentage for several years.
Therefore, check the terms of your own mortgage.
When Does the ERC Period End?
The ERC usually applies for a set period.
For example, it may run until the end of a fixed-rate deal.
After that date, you may be able to repay or change the mortgage without an ERC.
However, other fees could still apply.
Therefore, check the exact end date rather than assuming when the charge stops.
Do All Mortgages Have ERCs?
No.
Some mortgages have no Early Repayment Charges.
Others only have them during part of the mortgage term.
For example, some variable-rate mortgages may offer more freedom to repay the mortgage.
However, this varies between lenders and products.
Therefore, never assume a mortgage is free from ERCs.
Do Fixed-Rate Mortgages Have ERCs?
Many fixed-rate mortgages do.
For example, you may fix your rate for two or five years.
During that period, an ERC may apply if you leave the deal early.
This is important when choosing how long to fix your mortgage.
A five-year fix gives you longer payment certainty. However, it may also restrict you for longer.
What Happens If You Remortgage Early?
Remortgaging normally means replacing your current mortgage with another one.
If your existing mortgage is still within its ERC period, you may have to pay a charge.
For example:
Mortgage balance: £180,000
ERC: 2%
The charge could be:
£3,600
Therefore, a new mortgage with a lower interest rate may not actually save you money.
You need to consider the ERC as well.
Is It Ever Worth Paying an ERC to Remortgage?
Possibly.
Suppose another mortgage has a much lower rate.
The saving could be greater than the cost of leaving your existing deal.
However, you also need to consider other costs.
These could include:
- product fees
- legal costs
- valuation fees
- broker fees
Therefore, compare the total cost before switching.
Can You Remortgage Before Your Deal Ends?
Yes.
You can often start looking for your next mortgage before your current deal finishes.
This does not always mean you need to leave your existing mortgage immediately.
For example, a new mortgage offer may be valid for several months.
This could allow you to arrange the next mortgage and wait until your ERC period ends.
However, mortgage offer periods vary.
Therefore, check the dates carefully.
Can Overpayments Trigger an ERC?
Yes.
Many mortgages allow some overpayments without a charge.
However, there may be a limit.
If you pay more than the allowed amount, an ERC may apply to the extra payment.
Therefore, check your overpayment allowance before paying a large lump sum.
What Is an Overpayment Allowance?
An overpayment allowance is the amount you can repay above your normal payments without an ERC.
For example, a mortgage may allow you to overpay up to a certain amount each year.
The lender may base this on:
- your mortgage balance
- the original mortgage amount
- a fixed amount
The rules vary.
Therefore, check how your own allowance is calculated.
A Simple Overpayment Example
Suppose your lender allows you to overpay:
£10,000
without an ERC.
You make an extra payment of:
£8,000
This is within the allowance.
Therefore, an ERC may not apply.
However, if you pay:
£15,000
the extra £5,000 could be treated differently.
The exact charge depends on the mortgage terms.
Does the Overpayment Allowance Reset?
Often, the allowance applies over a set period.
For example, it may reset each calendar year or mortgage year.
However, this varies between lenders.
Unused allowance may not carry forward.
Therefore, check the rules before planning your payments.
Can Regular Overpayments Cause an ERC?
They can if you go above the allowed limit.
For example, you may decide to pay an extra £500 each month.
Over a year, that would be:
£500 × 12 = £6,000
You need to make sure this stays within your mortgage’s overpayment rules.
Therefore, consider all your extra payments together.
What Happens If You Sell Your Home?
Selling your home normally means repaying the mortgage.
If you are still within an ERC period, a charge may apply.
This can make moving home more expensive.
Therefore, consider your future plans before choosing a long mortgage deal.
What If Your Mortgage Is Portable?
Some mortgages are portable.
This means you may be able to take the existing mortgage deal to another property.
However, porting is not automatic.
You normally need to apply again and meet the lender’s rules.
The new property must also be acceptable.
Therefore, do not assume that a portable mortgage guarantees you can avoid an ERC.
What If You Need to Borrow More When Moving?
Suppose you have a portable mortgage of:
£150,000
However, you need:
£200,000
to buy your next home.
You may be able to port the existing mortgage and borrow another £50,000.
However, the extra borrowing may be on a different mortgage deal.
This could mean having two parts of your mortgage with different rates and end dates.
Therefore, check how the arrangement will work.
What If You Need a Smaller Mortgage?
This can also create an issue.
Suppose you owe £200,000 but only need a £150,000 mortgage on your next property.
You may need to repay £50,000.
An ERC could apply to some of that amount.
However, the exact rules depend on the lender.
Therefore, check before committing to the move.
What Happens If You Repay the Whole Mortgage?
If you repay your mortgage while an ERC applies, you may have to pay the charge.
For example:
Mortgage balance: £100,000
ERC: 3%
The charge could be:
£3,000
This could happen if you sell your home or use savings to clear the mortgage.
Therefore, ask the lender for the full repayment figure first.
What Is a Redemption Statement?
A redemption statement shows how much you need to pay to clear your mortgage.
It can include:
- your mortgage balance
- interest due
- Early Repayment Charges
- other fees
Therefore, the amount needed to clear the mortgage may be higher than the balance shown on your normal statement.
What Happens When Your Fixed Rate Ends?
Once the fixed-rate period ends, the ERC linked to that deal will usually end too.
If you do nothing, you may move onto the lender’s Standard Variable Rate (SVR).
At this point, you may have more freedom to change mortgage.
However, check your mortgage terms because other charges may still apply.
ERCs and Product Transfers
A product transfer means changing to another mortgage deal with your current lender.
Your lender may allow you to arrange a new deal before the existing one ends.
However, the rules vary.
Therefore, check when you can switch without paying an ERC.
ERCs and Interest-Only Mortgages
Interest-only mortgages can also have ERCs.
The repayment method does not decide whether an ERC applies.
Instead, it depends on the mortgage product.
Therefore, check the terms whether your mortgage is repayment or interest-only.
ERCs and Buy-to-Let Mortgages
Buy-to-let mortgages can also have Early Repayment Charges.
In some cases, the charges can be significant.
Therefore, landlords should include ERCs when considering whether to sell or remortgage a property.
A lower new mortgage rate does not automatically make switching worthwhile.
Should You Choose a Mortgage Without an ERC?
Not necessarily.
A mortgage without an ERC may offer more flexibility.
However, it may have a different interest rate or other costs.
Therefore, compare the whole mortgage.
The cheapest option depends on your plans and circumstances.
Think About How Long You Need the Deal
Before choosing a fixed mortgage, consider how your life could change.
For example:
Could you move home?
Might you repay a large amount?
Could your job change?
Are you likely to receive a large sum of money?
Do you expect to remortgage soon?
If flexibility is important, ERCs deserve close attention.
Two-Year or Five-Year Fix?
Suppose you are choosing between a two-year and five-year fixed mortgage.
The five-year deal gives you payment certainty for longer.
However, you may also have ERCs for longer.
The two-year deal gives you less time at the fixed rate. However, you may be free to change mortgage sooner.
Therefore, the interest rate is not the only difference.
Consider your future plans too.
Don’t Confuse an ERC With an Exit Fee
An Early Repayment Charge and a mortgage exit fee are different.
An ERC is normally linked to repaying or leaving a mortgage during a restricted period.
An exit fee is usually an administration charge for closing the mortgage account.
In some cases, both could apply.
Therefore, check all charges before repaying your mortgage.
How Can You Check Your ERC?
Your ERC should be shown in your mortgage documents.
You may also be able to find it:
- on your mortgage statement
- through online banking
- in your mortgage account
- by contacting your lender
If you are thinking about leaving your mortgage, ask the lender for the exact charge.
This is better than estimating it yourself.
Before Repaying Your Mortgage Early
Check four things first:
1. Your current mortgage balance
2. Your Early Repayment Charge
3. Your remaining overpayment allowance
4. The date the ERC ends
These figures can make a big difference to your decision.
A Simple Example
Suppose you owe:
£200,000
Your ERC is:
2%
You are considering moving to another mortgage.
The ERC would be:
£4,000
The new mortgage might save you £150 per month.
Over two years, that would be:
£150 × 24 = £3,600
In this simple example, the mortgage saving would be less than the £4,000 ERC.
There may also be fees for the new mortgage.
Therefore, switching would not automatically save money.
The Key Point
An Early Repayment Charge is a fee that may apply when you repay or change your mortgage early.
The charge can sometimes run into thousands of pounds.
Therefore, check the ERC before:
- remortgaging
- selling your home
- making a large overpayment
- repaying your mortgage
- changing mortgage deal
Most importantly, do not compare a new mortgage with your existing one using interest rates alone.
Work out the cost of leaving your current mortgage first.
A lower mortgage rate may look attractive. However, if you have a large Early Repayment Charge, switching may cost more than you save.