What is an Early Repayment Charge?

If you’re considering making overpayments on your mortgage, you have to consider early repayment charges (ERCs, an early repayment charge is known as an ERC in the mortgage industry).

You might also be affected by ERCs if you remortgage with lenders, sometimes inserting them into a new deal, especially if you switch lenders.

In this article, we’ll look at what ERCs are, how they can affect your repayments and some ways you can mitigate their impact.

What is an early repayment charge?

An early repayment charge (ERC) is a penalty your lender might apply if you overpay on your mortgage. This often happens if you overpay by more than they allow or pay off the whole loan before your term ends.

Lenders apply ERCs to make up for the lost interest they would have had if you hadn’t repaid early. ERCs typically apply to fixed-rate mortgages, tracker and discount mortgages, where the lender would expect to receive a certain amount of interest over a set period.

When might you pay an early repayment charge?

The most common scenarios in which you might pay an ERC is if you pay off your mortgage sooner than expected or overpay too much for one month. Below are some common reasons you might receive an ERC.

• Overpayments on your mortgage: Most lenders allow you to overpay a little each year, typically 10% or lower. If you exceed this amount, you’ll likely receive an ERC.
• Repaying your mortgage early: This is one of the most common reasons for receiving an ERC. The lender won’t receive the anticipated interest if you pay off the mortgage before the end of your term.
• Remortgaging to a new lender: If you decide to remortgage onto a new deal with a different lender before the end of your current term, your current lender will likely charge an ERC. An easy way to avoid this is to wait until the end of your mortgage term to remortgage.
• Switching mortgage products with the same lender: You might also incur an ERC if you switch products with your current lender, for example, from a fixed-rate to a tracker mortgage. This is because lenders want to recover the interest they might lose from the expected interest.
• Selling your property: If you sell your property because of a relocation or to move to a new place, an ERC might apply once your deal is terminated.

How much does an early repayment charge cost?

An ERC typically costs between 1% and 5% of the remainder of what you owe on your mortgage agreement. This might not sound like much, but depending on the amount you still owe, it could be a considerable sum.

For example, if you have an outstanding balance of £250,000 on your mortgage, a 1% charge will result in you paying £2,500. Another thing to consider is that the percentage often decreases the longer you’ve had your deal.

So if you had £100,000 left on your mortgage balance with a 3% ERC for the first year, you’d pay £3,000. But if it decreases to 1% after two years, the charge would now be £1,000. Sometimes, a fee might not apply after a set number of years on your current deal, so it’s worth checking the fine print before considering making an ERC.

How to avoid paying an early repayment charge

While ERCs apply to most mortgages, there are ways you can avoid paying them. Some of them are listed below:

• Get a mortgage without charges: This is the simplest way to avoid charges, but there are caveats. If you’re a first-time buyer, you’re unlikely to get a mortgage without ERCs. However, some fixed-rate mortgages don’t have ERCs; you can negotiate this with your lender.
• Stay within overpayment limits: Most mortgages will allow you to overpay up to 10% each year. You’ll avoid extra charges if you don’t exceed this figure. It’s a good idea to contact your lender before you make overpayments to ensure you don’t incur any charges.
• Time your extra payments: If you receive a lump sum such as an inheritance or bonus, the temptation is to use it to pay off part or all of your mortgage. However, when you use this money, it can make a big impact. The best bet is to wait until no ERCs apply or towards the end of your term when any charges are likely to be lower.
• Port your mortgage: If you’re moving home, porting your mortgage from your existing one to your new one should allow you to avoid any charges depending on the terms set by your lender.
• Avoid the Standard Variable Rate: Once your mortgage term ends, you’ll be moved to your lender’s Standard Variable Rate, which usually means you pay more in interest. If you’re staying with the same lender, agree on a new deal before your current one ends to avoid this. Also, ensure you won’t face any ERCs when doing this.

Can I get my early repayment charge refunded?

If you believe you’ve been charged an ERC unfairly, you can file a complaint with your lender. This also applies if you feel extenuating circumstances resulted in you paying the charge. Once you have lodged your complaint, your lender will have up to eight weeks to respond to your concerns.

Once you receive a response, if you feel it does not address your concerns, you can take your case to the Financial Ombudsman Service. They will consider your complaint, and if they decide it wasn’t fair for the lender to apply the charge, it may be waived or partially refunded.

How a mortgage broker can help

Before making any overpayments, it is recommended that you seek professional advice from a mortgage broker. There may be alternatives to consider, such as investing your disposable income or finding a deal elsewhere with a lower interest rate, and they can advise whether you may face an ERC or not.

The right mortgage broker can talk you through the alternatives and help you understand the full implications of overpaying and ERCs. If your lender’s policy on overpayments doesn’t fit your needs, your mortgage broker could help you remortgage and move to a more suitable agreement.

We offer a broker-matching service that will quickly assess your needs and circumstances to pair you with the ideal advisor. One with a strong track record of helping people make overpayments without incurring unnecessary fees. Call 0330 818 7026 or make an enquiry, and we’ll set up a no-obligation chat between you and a broker we’ve handpicked for you today.