What are early repayment charges? When do I pay them?

• Early repayment charges are fees (typically 1-5% of your outstanding balance) for breaking your mortgage deal early.
• They usually only apply during your initial deal period (2-5 years), not for your entire mortgage term.
• You'll face ERCs when remortgaging, making large overpayments, or paying off your mortgage during the charge period.
• Most lenders allow 10% annual overpayments without penalty - time your remortgage to avoid charges entirely.
• Calculate whether long-term savings justify the upfront ERC cost before switching deals early.

Early repayment charges (ERC) can cost you thousands of pounds. They might apply to you if you’re getting a mortgage, looking to remortgage or pay off your mortgage. It's important to understand these potential charges and how to avoid them before making any decisions.

An early repayment charge is a fee your mortgage lender charges if you remortgage or pay off all or part of your mortgage earlier than agreed. Think of it as a penalty for breaking the terms of your mortgage deal before the agreed period ends.

How are ERCs calculated

You’ll likely encounter ERCs during the initial period of a fixed-rate, tracker, or other mortgage deal – they typically apply in the first 2-5 years. The percentage may change as your mortgage goes on.

An early repayment charge is usually calculated as a percentage of your outstanding mortgage balance. Usually between 1% and 5% (depending on your mortgage deal), meaning it could cost you thousands.

Early repayment charge example

If you have a £200,000 mortgage with a 5% charge for the first year, your ERC would be £10,000. If this reduces in the second year to 4%, and assuming your ERC is based on the outstanding balance which is now £185,000 for example, your early repayment charge would be £7,400.

It's important to understand that ERCs aren't just about paying off your entire mortgage. They can also apply when you make overpayments above your lender's annual allowance (usually 10% of your outstanding balance), switch to a different mortgage product, or remortgage to a new lender during the charge period.

Lenders use ERCs to protect themselves when offering competitive rates below their standard variable rate. They budget to earn a certain amount of interest during your deal period, and early repayment means they lose that expected profit.

ERCs help ensure customers don't just "rate hop" constantly, switching to new deals every few months when slightly better rates appear. This encourages longer-term relationships and allows lenders to offer genuinely competitive initial rates.

Types of mortgages

ERCs are common on most mortgage deals during their initial promotional periods (typically 2-5 years), regardless of whether they're fixed-rate, tracker, or discounted variable rate mortgages. Lenders use these charges to ensure you stick around for the competitive rate they've offered.

For example, if you have a 2-year fixed rate or a 2-year tracker mortgage, you'll likely face charges if you remortgage, make large overpayments, or pay off your mortgage during those first two years.

Standard variable rate (SVR) mortgages, on the other hand, typically don't have early repayment charges since these are your lender's default rate which is often higher and comes with no special terms attached.

Initial deal periods vs lifetime of mortgage

ERCs almost always apply only during your initial deal period – not for the entire mortgage term. Once your deal ends, the charges usually disappear, even if you have decades left to pay.

However, if you remortgage or switch to a new promotional deal, you'll typically face a new ERC period with your new rate.

Timing matters when remortgaging. If your deal ends in March, you can switch ERC -free from April. If you try to remortgage just one month early, and you could face thousands in charges.

Scenarios that trigger ERCs

You might face ERC charges in the following situations:

1. Remortgaging with a new lender

If you remortgage during your deal period, you’ll likely trigger an ERC fee. Even if you’re getting a much better rate elsewhere, you’ll need to factor in the cost of breaking your current deal.

2. Large overpayments

Making large overpayments beyond your annual allowance will trigger charges on the excess amount. Many lenders may allow you to overpay a certain percentage of your outstanding balance each year without penalty, but anything above this limit could get hit with the ERC.

3. Selling your home

If you’re selling your home and paying off the entire mortgage you may have to pay an ERC. This depends on the terms of your mortgage. Many mortgages can be ported, meaning if you move home, your existing mortgage can be moved to your new property.

But if you move during your initial period and go with a new lender, then you’ll be liable to pay the full ERC.

Speak to your lender and check your mortgage agreement to understand your options.

4. Paying off your mortgage

If you’re in a situation where you can pay off your mortgage in full and want to, doing this during your initial period will trigger the full ERC on your outstanding balance.

Annual overpayment allowances

Most lenders allow you to overpay up to 10% of your outstanding mortgage balance each year without triggering ERCs. This allowance resets each year so make the most of it if you can. Always check with your lender on your allowance and how you pay.

Timing your remortgage

Timing your remortgage for when your current deal ends will mean you avoid ERCs altogether. A good rule of thumb is to start looking for a new mortgage 3-6 months before your current deal ends, but don’t complete until after the ERC period expires.

Learn more: When should I remortgage?

Porting your mortgage

If you're moving home during your deal period, porting (transferring your existing mortgage to a new property) can help you avoid ERCs entirely. Your lender keeps the same terms and rate, just secured against your new home.

Bear in mind that porting isn't guaranteed - your lender will reassess your affordability and the new property. If you need to borrow more, the additional amount may be on current rates, creating a split mortgage.

Product transfer

Switching to a new deal with your existing lender (a product transfer) typically doesn't trigger ERCs, but double check with your lender. However, you'll be limited to whatever rates your current lender offers, which may not be the most competitive.

Product transfers are often quicker and cheaper than full remortgages, with minimal paperwork and no valuation fees. Compare what your lender offers against the wider market before deciding.

Learn more: Product transfers vs remortgaging

Get a ‘no early repayment charge’ mortgage

Some lenders offer mortgages without early repayment charges, though these typically come with higher interest rates to compensate. Standard variable rate mortgages usually don't have ERCs, and some tracker mortgages also offer penalty-free overpayments and exits.

If flexibility is important to you - perhaps you're expecting a bonus, inheritance, or might need to move home - it might be worth paying a slightly higher rate for the freedom to overpay or switch without penalties.

When it makes financial sense

Paying an ERC can be worthwhile if the long-term savings outweigh the upfront cost. This typically happens when rates have dropped significantly, or your financial position has improved, and you can access much better deals.

It might also make sense if you're moving home and can't port your mortgage, or if your current lender's follow-on rates are particularly uncompetitive compared to what's available elsewhere.

How to calculate if switching saves money

Compare your ERC cost against potential monthly savings. For example, if switching saves £150 monthly but costs £3,000 in ERCs, you’ll break even after 20 months and save money thereafter.

Don't forget to factor in other switching costs like arrangement fees, valuation fees, and legal costs. Online remortgage calculators can help, but they often don't include all fees, so get quotes directly from lenders for the most accurate picture.

Learn more: How much does remortgaging cost?

Getting professional advice

A qualified mortgage broker can run the numbers across multiple lenders and scenarios to determine if paying an ERC makes financial sense for your situation. They have access to exclusive deals and can factor in all associated costs.

Your current lender might also offer retention deals to keep you from switching - it's worth asking what they can offer before paying ERCs to move elsewhere.

Can I negotiate my early repayment charge with my lender?

While ERCs are typically fixed in your mortgage terms, some lenders may be willing to waive or reduce charges in exceptional circumstances, such as job loss, serious illness, or relationship breakdown. It's always worth calling your lender to discuss your situation - the worst they can say is no.

Do early repayment charges affect my credit score?

No, paying an early repayment charge won't directly impact your credit score. ERCs are contractual fees, not missed payments or defaults. However, if you can't afford to pay the charge and it prevents you from making your regular mortgage payments, that could affect your credit rating.

What happens to my ERC if interest rates rise after I took out my mortgage?

Your ERC remains the same regardless of what happens to interest rates after you took out your deal. The charge is based on the terms you agreed when you signed your mortgage contract, so even if rates rise dramatically, you'll still pay the same ERC percentage if you exit early.