Mortgage early repayment charges explained

At a glance

• An early repayment charge (ERC) is the fee you’ll pay if you want to repay your mortgage when you’re still in an initial term.
• ERCs are typically between 1% and 5% of the mortgage balance, and so can easily run into the thousands of pounds.
• ERCs can also be charged if you want to remortgage early or exceed your annual overpayment limit (which will typically be 10% of the balance).

Being able to pay off your mortgage early may sound ideal, but unless you time it right, you’ll have some hefty fees to pay. Find out more about early repayment charges and what they entail, and crucially, how you can avoid them.

What is an early repayment charge?

If you want to pay some or all of your mortgage back early – in other words, before the end of the agreed term – you’ll be charged a fee for breaking the contract. This is called the early repayment charge, or ERC, and can typically range between 1% and 5% of your mortgage balance.

ERCs can apply to both fixed and variable rate deals with an initial term, but not if you’re on your lender’s standard variable rate (SVR). They don’t always apply to some tracker deals either, so always check the terms of your mortgage.

ERCs may seem like an unfair charge. After all, why can’t you repay your mortgage whenever you like? The reality is that, because you agreed with your mortgage provider to abide by certain terms, you’re obliged to compensate them for breaking those terms. Lenders charge ERCs to compensate for the money they miss out on when the loan is repaid early – they’re receiving less interest if you’re no longer paying the mortgage, so they expect you to cover that loss.

When do you need to pay an early repayment charge?

You’ll likely need to pay an ERC if you’re still in the initial mortgage term and any of the following scenarios apply:

• You pay off your mortgage in full before the end of the agreed term.
• You overpay your mortgage above the allowable threshold. Typically you’re allowed to overpay 10% of the outstanding balance per year, but if you exceed this, you’ll be charged an ERC.
• You’re looking to remortgage early or otherwise leave your existing deal. Note that this applies whether you stay with your current lender or go to a new one.
• You sell your home and don’t need/want to remortgage.
• You’re downsizing and will need a smaller mortgage.
• You move home but can’t port the mortgage.

Essentially, if you’re in an initial term and want to remortgage, overpay a significant proportion of the balance or repay your mortgage completely, you’ll likely need to pay an ERC.

How much are early repayment charges?

ERCs can vary depending on the lender, your mortgage balance and how long you’ve got left on the deal, but can typically be anywhere between 1% and 5% of the amount you owe.

The percentage you’re charged can also vary depending on when you want to pay back your mortgage – for example, if you want to repay it in the first year of a five-year fixed rate deal, you might be charged 5%, but if it was in the final year of the term it may only be 1%.

Example: Let’s say you’ve got a £200,000 mortgage on a five-year deal. If you want to exit the deal within the first year and your lender’s charging an ERC of 5%, you’d have to pay £10,000 in fees. In the fifth year of the deal, you may only have to pay £1,500 (based on an ERC of 1% and assuming your mortgage balance had reduced to £150,000 over that time).

You’ll get an exact figure when you contact your lender to let them know you want to repay your mortgage early.

They’ll provide you with a mortgage redemption statement showing how much you need to pay in order to clear the mortgage (including the remaining balance and any interest due), along with the ERC you’ll have to pay and any other exit fees. The statement will be valid for a specified period, typically around four weeks, and so the totals may change if you don’t repay the mortgage within that time.

How to pay an early repayment charge

There are typically two options when it comes to paying an ERC:

1. You can pay it upfront in a lump sum. You’ll be notified of the ERC when you’re making the overpayment, remortgaging and/or clearing the mortgage balance, and you can pay it at the same time.
2. You can add it to the mortgage balance. If you’re remortgaging you can choose to add the ERC to your new mortgage balance to repay it over the term of the new deal. However, this means that interest will now be charged on the ERC, and so it will cost more overall.

Is it worth paying an early repayment charge?

There may be times when paying an ERC early may be worth it – namely if it allows you to save more by remortgaging.

This may be the case if, for example, you’re approaching the end of a fixed deal and so the ERC percentage would be low, but mortgage rates are starting to rise, which could mean you’re forced to remortgage to a much higher rate if you waited until the end of the term.

There’s no easy way to tell if it’s worth paying an ERC, as it all comes down to the numbers involved.

This is where speaking to a mortgage broker can be invaluable. They’ll run the calculations for you to help you work out what scenario would be best for you and your circumstances.

Remember, you don’t have to repay your mortgage completely to be charged an ERC – you’ll also have to pay it if you exceed your annual overpayment allowance (which is typically 10% of the balance; check the terms of your mortgage if you’re unsure).

In this case, it likely wouldn’t be worth paying an ERC, as doing so could end up costing you more in fees than you’d save in interest from the overpayment. Find out more about whether you should save or pay off a mortgage.

How to avoid early repayment charges

The most obvious way to avoid early repayment charges is to not pay off your mortgage early! But, of course, it isn’t as simple as that. Overpaying your mortgage can actually be incredibly beneficial if it’s done at the right time, so here are a few ways you can avoid ERCs:

• Time it right. You should aim to wait until the end of the term before remortgaging, moving home or overpaying more than 10% of the balance. If you’re remortgaging with the same lender, you may be able to switch to a new deal a few months early without being charged an ERC, but make sure to check. Find out more about when you should remortgage.
• Make overpayments within the allowable limit.
• Port your mortgage when moving house. Note that if you’re moving to a cheaper property and are reducing your mortgage balance, you’ll likely still have to pay an ERC on the part you’re not porting.
• Choose a mortgage without ERCs. There are a few mortgage deals available that don’t impose ERCs – typically tracker deals or SVRs – but the rates tend to be higher, so it’s important to work out if this is the right option for you.

That said, for those who may need that level of flexibility, they can be worth considering.

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