Early repayment charges: The complete guide

What are early repayment charges and how can you avoid them? Find out here.

If you repay your mortgage early or make an overpayment that’s more than your allowance, an early repayment charge (ERC) may be due.

Essentially, this means you’re being penalised for breaking the deal early, so the lender uses the fee to recoup some of the interest it’s losing.

The charge is usually a percentage of the outstanding mortgage debt, which often reduces the longer you stay with it.

Check your mortgage offer for any details of ERCs that you might need to pay.

Types of mortgage with early repayment charges

Early repayment charges can apply to all kinds of mortgages, whether they’re fixed-rate mortgages or variable-rate mortgages, such as tracker and discount deals.

It’s a common misconception that variable-rate mortgages don’t have ERCs, but that’s not really true.

The only mortgages that don’t typically have early repayment charges are standard variable rate (SVR) products, which your lender will usually move you onto if you don’t switch when a deal on another sort of mortgage comes to an end.

How to find out if ERCs apply to your mortgage

Check your original mortgage offer to find out about any ERCs as lenders are obliged to clearly state this in the offer.

Also remember that unless your mortgage allows you to make overpayments penalty-free, ERCs will also apply to overpayments.

Another way to find out is to contact your lender, who’ll be able to tell you what ERCs apply to your mortgage and when they’ll cease to apply.

How much are early repayment charges?

ERCs vary from product to product, but are typically between 1% and 5% of the mortgage.

Sometimes they will reduce over time. For instance, you might take a five-year deal with ERCs of 5% in year one, falling to 1% in year five of the deal, which could be a significant cost to you.

The Financial Conduct Authority’s guidelines state that ERCs in mortgage contracts must be expressed as a cash value and must be a reasonable pre-estimate of the costs the lender would incur if the customer repaid early.

These costs must be disclosed in the mortgage offer documents before the mortgage is taken out, so make sure you check before you commit.

ERCs on overpayments

As mentioned above, unless your mortgage allows you to make overpayments penalty-free, ERCs also apply to overpayments.

Some mortgages allow you to overpay a set amount of the outstanding balance each year, typically 10%. But if you exceed this, ERCs will apply to the extra amount overpaid.

For instance, consider a £100,000 mortgage with ERCs of 2% that allows penalty-free overpayments of 10% per annum.

If you decided to overpay £20,000, ERCs would apply to £10,000, which would mean paying an ERC of £200.

How to avoid paying an early repayment charge

  • Wait until the early repayment period expires.
  • Find a mortgage without such a charge (see more on this below).
  • If you’re remortgaging, make sure the new one doesn’t start until your current mortgage’s repayment period ends.
  • If you’re moving house, see if you can port your mortgage – ie take your current mortgage with you to your new property.

Finding a mortgage without early repayment charges

If you value flexibility or you think your circumstances might change before your mortgage deal expires, it’s really important to take ERCs into account when you’re looking for a mortgage or remortgage.

If you think you might need to repay early – whether to sell up, move or overpay – before the mortgage deal ends, you might be better off considering a product with low or no ERCs, even if that means paying a little more in interest.

Some people accidentally incur ERCs by remortgaging too early. Before giving a completion date for your remortgage, make sure you double check the expiry date of any ERCs and only complete after this time.

Should you pay ERCs?

ERCs can be extremely costly, frequently amounting to thousands of pounds, but sometimes it might still be the right decision to pay them. For instance, if you’re on an expensive mortgage deal, it might still be more cost-effective to pay the ERCs to move onto a cheaper deal.

You may also want to remortgage to a different type of product – for instance from a variable rate to a fixed rate for peace of mind – in which case you might consider that the ERCs are worth paying.

Whatever your circumstances, a mortgage adviser will be able to help you crunch the numbers to see if there’s a better option for you.

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