Early repayment charges and how to avoid them

Early repayment charges (ERC) can cost thousands. So whether you're getting a mortgage, looking to remortgage or pay off your mortgage, you need to know how they work, what they'll cost you - and how to avoid them.

Rebecca Gamble Consumer Journalist

What is an early repayment charge?

An early repayment charge (ERC) is a fee you may incur if you pay off your mortgage before the agreed end of your deal by remortgaging or paying off the balance. You may also need to pay an ERC if you overpay on your mortgage by more than your lender allows.

An early repayment charge is usually calculated as a percentage of your outstanding mortgage balance. This is typically between 1% and 5% so it could amount to thousands of pounds.

Some lenders reduce the rate you pay the longer you’ve had the deal. For example, if you take out a 5 year fixed rate mortgage, the EPC might be 5% in the first year, dropping to 4% in the second year, 3% in the third year, 2% in the second year and finally 1% in the last year. Santander is one of the many lenders that often offers stepped early repayment charges.

But some other deals have a flat ERC chargeable throughout. For example, Barclays offers a 10 year fixed rate mortgage that charges a 5% EPC for the entire term of 10 years.

Here’s an example of how much an early repayment charge could cost:

1. If you have a mortgage balance of £200,000 on a 2 year fixed rate mortgage and it has a 2% charge for the first year, the ERC would be £4,000. If this steps down to 1% in the second year, assuming your ERC is based on the outstanding balance of your mortgage and that this has reduced to £190,000, the ERC would be £1,900.
2. But if you took out a 10 year deal and have a mortgage balance of £200,000 and there’s a 5% fee for the duration of the term, the ERC would be £10,000. But if your mortgage balance falls to £150,000 your ERC would be £7,500.

How do I know if I need to pay an ERC?

If your mortgage has an ERC it will be stated clearly in the ESIS document you were given with your mortgage documents, which details the key features and risks of the mortgage. Your annual mortgage statement should also set out any applicable ERCs at the date of each statement.

Are ERC’s important when getting a mortgage

Yes. Whether you’re getting your first mortgage or remortgaging, you need to consider these charges.

Life is unpredictable and even if you don’t intend to change your circumstances over the course of the mortgage it’s a good idea to be alert to what you would pay if you wanted to switch deals or pay off more.

Speak to a fee-free mortgage broker. They can do the leg work for you, not only finding the best rate but also setting out the arrangement fees and any early repayment charges and how they are structured. They can also advise on your remortgaging options.

When might I pay an early repayment charge?

You might have to pay an early repayment charge when:

• You’ve overpaid on your mortgage: Most mortgages let you overpay a certain amount on your mortgage each year. This is often 10%, however it could be less – or more. If you go over the threshold you could face an ERC.
• You’re remortgaging: Another common reason why people may need to pay an early repayment charge is if you remortgage during the initial term of your mortgage.
• You’re moving house: If you are selling your house which has a mortgage during the initial term and porting your existing mortgage isn’t an option or you don’t want to do it, you may face an early repayment charge. Also, if you buy a new house and only port part of your mortgage, for example if you’re downsizing, you may be charged the ERC on the part that you don’t take with you.

How can I avoid paying an early repayment charge?

1. Remortgage with the same lender

If you remortgage with the same lender, known as a product transfer, instead of remortgaging with a different lender your lender may waive the ERC. But you’ll often only be able to avoid an ERC if you switch in the last few months of your mortgage deal. Also, sticking with the same lender may mean you don’t get the best deal for you overall. So it’s a good idea to speak to a fee-free mortgage broker who can run through all your options with you.

2. Time your remortgage right

If you want to remortgage with a new lender you may not be able to avoid the ERC until your current deal ends. But you can start the remortgage process up to 6 months before your mortgage deal ends. So start the groundwork early so that you’re ready to switch deals as soon as you’re able to do so without incurring a charge.

3. Overpay at the right time

Most lenders will offer some degree of ERC-free overpayment. This is typically 10% per year but with some lenders such as NatWest, Metro, Atom Bank it can be double that at 20% per year. So check your paperwork to see what it is for your mortgage.

And be sure to check how that allowance is calculated and over what period. For example, some lenders will allow 10% of the original balance but most will be of the outstanding balance each year.

4. Choose a ‘no early repayment charge mortgage’

When you are taking out a new mortgage, you may choose to look for a no early repayment charge mortgage. These deals may have no early repayment charge at all or if may be that you can avoid having to pay one after a number of years.

Standard variable rate mortgages typically come with no early repayment charges but these can be expensive. And there may be other options that also come without an ERC; they’re more likely to be tracker mortgages than fixed rate mortgages but you may find some fixes available. Although you may need to pay a higher rate for a no ERC mortgage in exchange for the flexibility. So it’s advisable to speak to a fee-free broker and they’ll find the best deal for you.

5. Port your mortgage

If you’re selling and buying a new house, check if you can port your mortgage in order to avoid paying an early repayment charge. Find out more in our guide Porting a mortgage: How does it work?

Get expert remortgage advice from our fee free mortgage partners L&C

Is there a mortgage early repayment charge calculator I can use?

You’ll find mortgage early repayment charge calculators online but we don’t recommend using them in case you are given an inaccurate result. If you need to calculate your early repayment charge we recommend speaking directly to your lender.

Can I get an early repayment charge waiver?

Some lenders may waive the early repayment charge if you’ve only got a few months left on your mortgage deal. However, this is often only the case if you take out a new mortgage with your current lender – known as a product transfer.

Why do lenders set these charges?

According to our expert David Hollingworth at L&C mortgages, “Early repayment charges are there to protect the lender from borrowers redeeming the mortgage and leaving them holding funds that they could no longer lend at the same rate.

For example, if a borrower takes a fixed mortgage deal the lender will have priced that deal according to the cost of funding plus any margin at that point. If rates subsequently fall and the borrower redeems the loan to take advantage of a lower rate it could leave the lender with funds that it will no longer be able to lend at the required price and effectively be down on the deal.

As a consequence, lenders apply an ERC to effectively commit the borrower and at least ensure they are compensated if they do leave. “

How is an ERC calculated if I overpay too much?

If you make overpayments on your mortgage that are greater than the amount your mortgage allows you to, the ERC will be payable on the amount repaid over the threshold.

How do I pay an ERC?

You can choose to pay your early repayment charge in one lump sum. Or if you’re remortgaging, you may be able to spread the ERC over the term of your new mortgage.

Get expert remortgage advice from award winning mortgage brokers L&C

Can I complain about an early repayment charge?

There are various reasons why you may be unhappy that your lender has applied an ERC, such as if your lender didn’t tell you about the charge when you took out the mortgage or you weren’t told about it when you asked your lender about paying off some (or all) of your mortgage.

If you want to complain, your first step should be to talk to your lender. According to the Financial Ombudsman, they have to have to give you their final response within eight weeks for most types of complaint. After that, you can contact the Financial Ombudsman.

Do I need to pay any other fees if I pay off my mortgage?

There are other fees you may need to pay when you repay everything that you borrowed from your mortgage lender, such as a mortgage exit fee. Find out more in our guide on Mortgage fees and costs.

What is an early redemption penalty?

An early redemption penalty is another name for an early repayment charge.

Is it ever worth paying the early repayment charge?

Whether it’s worth paying the early repayment charge or not will depend on your circumstances and you should speak to a fee-free mortgage broker to discuss your options to find the best financial solution for you.

Might I have to pay the early repayment charge after my deal expires?

If you take out a fixed mortgage deal you should expect to typically be tied in during the fixed rate period and not beyond so that you are free to switch once the deal ends, penalty free. In decades gone by, extended penalty products were common, for example you might get a low 2 year fixed rate with a tie in for 5 or more years that would mean a period on the lender’s standard variable rate. But these are extremely rare now. However it is important to check the terms of individual deals to be clear on what the ERC may be and how long it lasts for.