Planning your finances, especially around your home, often involves looking for flexibility. You might want to move house, remortgage to a better deal or pay off your mortgage faster if you have spare cash. However sometimes making these changes during an initial mortgage deal period can result in unwelcome fees known as early repayment charges (ERCs). Understanding these potential costs is crucial before agree to any new mortgage offer.

This guide explains what early repayment charges (ERCs) are, why lenders use them, when they typically apply and how you might avoid them where possible.

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What are Early Repayment Charges (ERCs)?

Early repayment charges (ERCs) are fees charged by mortgage lenders if you repay all or a significant part of your mortgage principal amount earlier than agreed within a specific promotional period.

This period is typically the length of an initial deal, like a 2-year 5-year or 10-year fixed rate or a tracker/discounted rate term.

Essentially it’s a penalty imposed by the lender on you, the borrower, for breaking the terms of that initial mortgage agreement before it officially ends.

Seems harsh. Why do lenders charge Early Repayment Charges (ERCs)?

When lenders offer attractive initial rates like fixed deals, they calculate their expected profit based on receiving interest payments from you over the entire agreed term of the mortgage.

So if you repay the loan much earlier than planned – whether by switching lenders, moving house or making large over payments – the lender loses out on that anticipated future interest income.

Thus Early repayment charges (ERCs) are designed to compensate the lender for some of this financial loss incurred when you end a deal earlier than expected.

When do Early Repayment Charges (ERCs) typically apply?

You’ll probably come into contact with early repayment charges (ERCs) if you do one of the following during your mortgage’s initial fixed or special deal period:

  1. Remortgage to a new deal with a different lender.
  2. Pay off the entire loan balance (usually because you are moving house and not taking the mortgage with you – known as porting).
  3. Overpay significantly so you exceed the lender’s penalty-free overpayment limit (often 10% of the outstanding balance per year but can vary).
  4. Sometimes even changing to a different mortgage product with your current lender before the initial deal ends can trigger ERCs.

It’s important to remember that ERCs typically only apply for the duration of that specific initial deal (e.g. the 2- 5- or 10 years). Once that period finishes and you revert to the lender’s Standard Variable Rate (SVR) ERCs usually no longer apply, allowing much greater repayment flexibility. This is not always the case though, so remember to carefully check your terms.

 

How are Early Repayment Charges (ERCs) calculated

The calculation method for Early Repayment Charges (ERCs) varies between lenders and products, so checking your specific mortgage documentation is essential. However they are usually calculated as a percentage of the mortgage amount being repaid early.

Common structures include:

A tiered percentage
The percentage might decrease each year remaining on the deal. For example a 5-year fixed rate might have a 5% ERC in year 1, 4% in year 2, 3% in year 3, and so on.

Percentage applied to
The charge might be a percentage of:

  • The total outstanding mortgage balance at the time OR
  • Only the amount repaid above any penalty-free allowance (e.g. above the 10% overpayment limit).

Even a small percentage can result in a substantial fee. For instance a 3% ERC on an outstanding balance of £150,000 would mean a hefty £4,500 charge. Always read the Key Facts Illustration or Mortgage Offer carefully.

How can you avoid or manage Early Repayment Charges (ERCs)?

While sometimes unavoidable, there are ways to minimise or avoid these charges on your borrowing.

It all starts with knowing the terms of your mortgage in detail. So before making any changes to what you pay, find your original Mortgage Offer or annual statement and check the exact ERC percentage, how long it applies for, and how it’s calculated.

Then you can make sure you utilise allowances and be certain any mortgage overpayments stay within your lender’s stated annual penalty-free limit (often 10%). In addition, and if possible, wait until your initial deal period ends before remortgaging or making very large repayments. Take the time to properly note the date your deal ends at the start to avoid costly calculation errors.

If you’re moving house, ask your lender if you can ‘port’ your existing mortgage deal (and its rate/terms) to your new property. This potentially avoids the ERC but be aware terms often apply here.

Finally, take the time to carefully consider your future needs BEFORE opting for a particular mortgage. If you anticipate needing flexibility soon, think about deals with shorter ERC periods (or even no ERCs although the interest rates on such products might differ). In general, fully understanding potential future early repayment charges (ERCs) is critical when selecting a mortgage and one of the areas a mortgage broker can help you understand.

The definitive source for your specific ERC details is your mortgage paperwork – the original Mortgage Offer or your latest annual statement. If you are unsure about potential early repayment charges (ERCs) contact your lender directly before taking any action like making a large overpayment or starting a remortgage application. Always remember, a quick check can prevent a costly mistake.

OneDome is here to help

Choosing a mortgage is complex but OneDome is here to help. If you have any questions about the specifics of mortgages, the wider mortgage process or want tailored advice on the different types of mortgages that suit your situation you can:

Important: Your home may be repossessed if you do not keep up repayments on your mortgage.