Consider early repayment charges if you're looking for a new mortgage, thinking about remortgaging or planning to overpay on your current deal.
It’s a penalty payment imposed by mortgage lenders if you:
Lenders levy this charge because, when they offer you a mortgage, the terms they apply are made on the understanding that you’ll keep the loan for an agreed amount of time.
If you overpay some, or repay all of the loan early, then you end up paying back less in interest in the long term, so there’s a cost to the lender. The early repayment charge (ERC) is there to compensate the lender for this loss and to discourage borrowers from switching every time they find a better deal.
You could be billed an ERC if, for example:
In certain circumstances an ERC may not be charged - for example if:
It depends what type of mortgage you have.
If you’re on a variable rate, such as a tracker mortgage, then you may be allowed to make unlimited overpayments without being charged an ERC.
With a fixed-rate mortgage deal, most lenders allow you to overpay with regular or lump-sum overpayments of up to 10% a year of the amount owed without incurring an ERC.
They’re usually calculated as a percentage of the outstanding amount on your mortgage. The percentage payable is usually between 1% and 5%.
For example, if you want to pay off an entire £100,000 mortgage and the ERC is 5%, the charge will be £5,000.
In some cases, the percentage charged will decrease over the term of your deal. For example, a 5% charge may be applied in year one of a five-year fixed-rate deal, decreasing to 4% in year two, 3% in year three, and so on.
Paying off your mortgage early - or switching to a mortgage with a lower interest rate - could save you thousands of pounds in interest.
But, in cases where an ERC is payable, you need to calculate whether it will cost you more than you’ll save.
If the cost is too high, then it might be sensible to wait until the end of your deal, when no ERC would apply.
But in some instances, paying an ERC could be worth it.
If you’re switching to a much lower interest rate, then the savings you’ll make could make up for the cost of the ERC. It really is a case of doing the maths.
If you’re unsure, it could be worth talking to a mortgage adviser.
Yes, there are mortgages that come with no ERCs, like standard variable rate mortgages and certain tracker mortgages. But they’re likely to be more expensive with higher interest fees.
However, if you want the flexibility to switch your mortgage and the option to overpay in the near future, then they can be worth it.
Perhaps you’re self-employed, with variable income. If you expect that income to rise in the following few years, you’d be in an ideal position to pay off more of your outstanding loan.
So, in a case like this, opting for an ERC-free mortgage could be worth it. Overpaying could save you thousands of pounds and help you pay off your mortgage early.
If you want to overpay or switch, you can avoid an ERC in a few ways.