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What is an early repayment charge?

We explain early repayment charges, how they work and ways you might be able to avoid them altogether!

A photo of Grace Lynch, the author

By Grace Lynch

Published on: 14 May 2022

5 min read

What is an early repayment charge?

It would make sense for mortgage lenders to want to get the money you owe them back as soon as possible. You might be surprised to learn you can actually face fees and charges for attempting to pay back your mortgage earlier than planned.

Early repayment charges or ‘ERCs’ are commonly found in mortgages but can apply to other types of loans too. It can be frustrating to realise that you have to pay an additional charge for repaying early, especially if you hadn’t realised you agreed to this when applying for your mortgage.

There are a lot of reasons you might want to switch or exit your mortgage early, it will just be worth weighing up if it is worth paying extra to do so.

Do you pay early repayment charges on mortgages?

Depending on the mortgage you have chosen, you might find yourself stuck with early repayment charges if you choose to pay off your mortgage or switch to another mortgage or lender before the end of your mortgage term.

You could have to pay an early repayment charge if:

  • You fully repay your mortgage before the agreed end of your mortgage term
  • You choose to switch to a new mortgage with the same lender
  • You choose to switch your mortgage to a new lender
  • You overpay more than your agreed overpayment allowance within the space of a year (10% with most lenders)

It tends to be fixed rate or discount rate mortgages that will include early repayment charges. This is because the lender is giving you a good deal temporarily and they ideally want to discourage you from immediately switching to a new lender or mortgage as soon as your special rate has ended.

Why would I repay my mortgage early?

A mortgage will in most cases involve loaning hundreds of thousands of £s and most people will need the entire mortgage term to be able to repay the full amount.

There are certain circumstances that might allow you to pay off most (if not all) of your mortgage years ahead of schedule. You might:

  • Have received profits from an investment
  • Sold another property
  • Received money from an inheritance

How much are early repayment charges?

How much you will be charged for early repayment can vary, as each mortgage lender will have different rules and policies in place.

In most cases an early repayment charge will be a percentage of the amount you have left to repay on your mortgage balance e.g. 3% of the total amount left.

EXAMPLE:

Jane has a mortgage of £150,000 to be repaid over 25 years at an interest rate of 5%. She is 5 years into her mortgage. Jane spots that another lender has a fixed rate mortgage that is better suited to her with an interest rate of 4%. She decides to remortgage to the new lender.

At this point Jane has repaid £30,000 (not including interest) and her remaining mortgage balance is £120,000. If her lender has set an early repayment charge of 3%, she can move to the new lender but would have to pay an early repayment charge of £3,600 (3% of £120,000).

Do all mortgages have early repayment charges?

Not all mortgages will have early repayment fees attached to them. If you suspect it is likely you will want to repay or switch your mortgage before the agreed time, it is best to spend some time searching for a mortgage that doesn’t include them.

There are various ways you can compare available mortgage deals:

  • Checking lender websites individually (can allow you to fully understand the mortgage terms and conditions but can be very time consuming)
  • Using price comparison websites to compare available rates (this may not tell you if there are additional charges, but can be a good starting point to finding a mortgage that suits your budget before researching further)
  • Getting advice and support from the right mortgage broker

Can I get a mortgage with no early repayment charges?

It is possible to find a mortgage that simply doesn’t include these fees as part of the mortgage agreement.

Be aware though that often you may be charged a slightly higher interest rate for mortgages where you don’t get charged you for exiting early. Usually, these mortgages will be a discount or tracker rate, meaning the interest you pay each month can vary over time (variable rate).

It can take extra time to find a deal without these charges but can be worth it longer term because:

  • The mortgage is more flexible, giving you the option to exit whenever you need to
  • You can overpay and reduce the amount you owe without risking being charged for doing so

How to find the best mortgages with no early repayment charges

It is possible to find mortgages that don’t include fees for repaying your mortgage earlier than planned. Several UK mortgage lenders offer mortgages with no early repayment charges including:

How to avoid early repayment charges

Here are 5 ways you can avoid paying an extra charge if you need to repay (or switch) your mortgage earlier than planned:

  1. Do your research before applying and be careful which lender/mortgage you pick
  2. Speak to an experienced mortgage specialist for advice
  3. Try not to remortgage or repay before your fixed or discount rate ends
  4. Don’t overpay more than your set overpayment allowance
  5. Check the terms and conditions of your mortgage closely before you decide to switch or repay your mortgage early

It is always wise to have a little extra room in your budget for additional fees when applying for a mortgage. The last thing you want is to be blindsided by an extra cost you weren’t expecting and then struggle to get the money together for it.

More often than not, these extra fees will occur during the initial application process or before your purchase has fully completed.

Other fees you may be charged when applying for a mortgage include:

  • Broker fees (varies depending on the broker)
  • Administration fees (a processing charge for all the admin involved in your mortgage application)
  • Completion fees (a charge from the lender upon the completion of your purchase)
  • Valuation fees (the amount charged by the lender for valuing the property you plan to buy)
  • Stamp duty land tax (not lender specific, but most people will need to budget for stamp duty when applying for a mortgage)
  • Land transaction tax (when buying in Wales)

Resources

Citizen’s Advice – Paying off a credit agreement early

Financial Conduct Authority – Mortgage lending statistics – December 2022

Statista – Mortgages in the the United Kingdom (UK)

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