What is an Early Repayment Charge?

If you’re thinking of making overpayments on your mortgage, you have to consider early repayment charges (ERCs).

You might also be affected by ERCs if you remortgage with lenders sometimes inserting them into a new deal, especially if you switched 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 mortgages 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 you overpay too much for one month. Below are some common reasons you might receive an ERC.

• Overpayments on your mortgage: Most mortgage lenders allow you to overpay a little each year, typically 10% or lower. If you go over this amount, you’re likely to receive an ERC.
• Repaying your mortgage early: This is one of the most common times when you’d receive an ERC. This is because 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. In some cases, 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 and 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 any extra charges if you don’t go above 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 of money 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 can make a big impact. Waiting until no ERCs apply or towards the end of your term when any charges are likely to be lower is the best bet.
• 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, be sure to check 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’s not addressed 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

Seeking professional advice from a mortgage broker is recommended before you decide to make any overpayments. 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 if you may face an ERCs 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 onto a more suitable agreement.

We offer a free, broker-matching service that will quickly assess your needs and circumstances to pair you with the ideal advisor for you, one with a strong track record of helping people make overpayments without incurring unnecessary fees. Call 0808 189 2301 or make an enquiry and we’ll set up a free, no-obligation chat between you and a broker we’ve handpicked for you today.