In this article I explain what a mortgage early repayment charge is. I also explain how it works, how much it is and how to avoid paying an early repayment charge if you want to move or remortgage.
What is an early repayment charge?
An early repayment charge (also known as an ERC) is a fee applied by your mortgage lender if you change the terms of your mortgage or repay it before the end of an agreed period of time.
Typically you will find early repayment charges associated with fixed-rate mortgages, where the interest rate applied to the mortgage is fixed for an agreed period of time, irrespective of the changes in the Bank of England base rate. The period of time that a mortgage rate is fixed is often referred to as the fixed-rate period.
Usually, fixed-rate mortgages have fixed-rate periods of 2, 3, 5 or 10 years, although it is now possible to fix your mortgage for up to 40 years. After a mortgage fixed-rate period ends the interest rate charged by the lender reverts to its standard variable rate (known as the SVR).
This rate is set by the lender and can be reduced or increased as they see fit but it is usually influenced by movements in the Bank of England base rate. Normally a lender’s SVR is higher than the fixed-rate applied during the initial fixed-rate period, although this isn’t always the case. If the Bank of England were to aggressively cut its base rate, as it did in 2008, then it is possible that the lender’s default SVR rate could end up being lower than the fixed-rate of interest paid during the fixed-rate period.
Early repayment charges aren’t usually applied when you are on the lender’s SVR. This would mean that you are free to remortgage onto a lower interest rate, if one is available, without penalty. While you won’t have to pay an ERC, bear in mind that as with any remortgage there may be administration and legal fees payable.
How do mortgage early repayment charges work?
Fixed-rate mortgages protect borrowers from sudden rises in mortgage rates and their monthly repayments are fixed throughout the fixed-rate period. Some tracker mortgages may also have a deal period, for example they may track a certain level above the Bank of England base rate for a certain period of time before reverting to the lender's SVR. As such the lender knows the level of interest and therefore profit it will earn from borrowers with such mortgages.
If a borrower pays off their mortgage early, be it through overpayments or remortgaging, the lender stands to make less money and so claws this back via an ERC.
An ERC is not only applied if you clear your mortgage entirely, it is also applied if you change the terms of your mortgage before the deal (usually a fixed-rate) period ends or if you overpay your mortgage. Most mortgages with an ERC will usually limit the amount you are allowed to overpay your mortgage in any given year without incurring an ERC. Typically this can be 10% of the outstanding amount borrowed.
An early repayment charge could also be payable if you move house and your mortgage is not portable, which means that you can’t transfer the mortgage to your new property. The terms and conditions of your mortgage will inform you whether the portability option is available.
Do all mortgages have early repayment charges?
No they don’t. ERCs are usually associated with fixed-rate mortgage products but there are some mortgages that don’t impose ERC’s and these are typically standard variable rate mortgages or tracker mortgages. But beware, some variable rate mortgages including capped and discount mortgages (and even tracker mortgages) can have early repayments charges.
How much are early repayment charges?
The early repayment charge will vary depending on the lender and the mortgage product. If a mortgage can potentially charge an ERC then it is usually between 1% and 5% of the outstanding mortgage balance.
While in some instances the ERC may be set at a fixed rate for an agreed period, it can also reduce over time. For example, it is not unusual for the ERC on a five year fixed rate mortgage to be 5% of the outstanding balance in year 1 and then reduce as shown in the table below. It means that from year 6 the ERC is removed altogether.
|Year||Early Repayment Charge (ERC)|
How to avoid early repayment charges on a mortgage?
If you want to avoid paying an early repayment charge on your mortgage then you should:
- Avoid overpaying your mortgage by more than allowed under the terms of your mortgage deal - usually 10% of the outstanding balance each year.
- Do not remortgage during the period when the ERC applies - this period is usually the same as the fixed rate period but can occasionally be longer. Even switching mortgages with your existing lender (called a product transfer) can trigger an ERC.
- Port your mortgage when you move - it may be possible to move (or ‘port’) your mortgage to the new property when you move and therefore avoid having to pay the early repayment charge. Check the terms and conditions of your mortgage or speak to your lender to find out if this option is available to you.
- Wait until the early repayment period ends before moving or remortgaging.
- Use mortgages with no ERCs - there are mortgages that don’t have ERCs and these typically are those where the money is lent on the lender's stand variable rate (SVR). Beware that some variable rate and tracker mortgages have ERCs.
- Add the early repayment charge to your new mortgage deal - although you don’t avoid paying the ERC (in fact you will end up paying more in the long-run due to the interest charged on your new mortgage) it does mean that you do not have to pay the ERC from your savings.
If you are thinking about remortgaging or moving house and you are worried about an early repayment charge on your existing mortgage then I suggest that you speak to a mortgage adviser as soon as possible. If you don't know a mortgage adviser whose opinion you trust, then you can get a free mortgage review in 30 seconds* from a vetted FCA regulated mortgage professional.
Best mortgages with no early repayment charge
It is possible to find mortgage deals that don’t impose early repayment charges, but they will almost always be variable rate mortgages including discounted mortgages. You can search for the best mortgage deals via our best-buy table, where you can see the early repayment charge for each deal by clicking “show more”. Usually, mortgages without ERCs tend to charge a higher interest rate than those that do levy an ERC.
If a link has an * beside it this means that it is an affiliated link. If you go via the link Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. But as you can clearly see this in no way influences our editorial integrity. The following link can be used if you do not wish to help Money to the Masses however you will not receive any stated offers - Vouchedfor