Early repayment charges explained

Mortgages have enough costs attached without adding another that can often be avoided. Find out more about early repayment charges: when they apply, how much you’ll have to pay and which mortgages come without them.

Mortgages have enough costs attached without adding another that can often be avoided. Find out more about early repayment charges: when they apply, how much you’ll have to pay and which mortgages come without them.

Mark Gordon
From the Mortgages team
4
minute read
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Posted 20 AUGUST 2021

What is an early repayment charge?

When you take out a mortgage, the terms of the agreement include: 

  • How much you’ll need to pay back each month. 
  • How many years you have to repay the loan in its entirety (the mortgage term).  
  • In most cases, a mortgage tie-in period. This is the minimum amount of time that you’re expected to stick with a particular mortgage deal.  

While these terms may have worked for you when you took the mortgage out, your situation can change. You might find yourself able to pay back more than the agreed amount per month or per year, or you may need to change your mortgage before the end of the tie-in period due to unforeseen circumstances.  

In both cases, a penalty fee may apply. This is known as an early repayment charge (ERC) and it’s one of a number of potential costs associated with having a mortgage

When do early repayment charges apply?

You may need to pay early repayment charges if: 

  • You make regular monthly overpayments. 
  • You get a lump sum that you want to put towards clearing your mortgage faster. 
  • You have to sell your home – for example, if you get divorced or there’s a significant change in your financial situation.  
  • You move to a new house, but your mortgage lender isn’t willing to port your existing mortgage across to the new property. This might be due to a change in policy, the fact that you’re no longer eligible for that mortgage – for example, you have a new job that pays you less – or the new property has features that put it outside the mortgage provider’s lending remit. 
  • You remortgage with your existing lender or move to a new lender before the end of the tie-in period. 

In each case, your mortgage provider needs to recoup some of the interest they’re losing out on, because they calculate their rates based on the entire mortgage term. An early repayment charge is how they do this.  

The details of any early repayment charges should be included in the terms of your mortgage agreement and explained clearly by your lender. 

How much are early repayment charges on mortgages?

An early repayment charge is typically between 1% and 5% of the outstanding mortgage balance. This amount may reduce over time, as you get closer to the end of the deal (or tie-in) period.  

However, in some instances you may only be charged on the proportion you pay over your annual overpayment allowance, which is typically 10% of the mortgage balance each year. 

This doesn’t mean that you shouldn’t overpay or pay off your mortgage early. It just makes it important to do the maths beforehand. 

Under the Financial Conduct Authority (FCA) Mortgage Conduct of Business rules (MCOB), early repayment charges must be expressed as a cash value and be a “reasonable pre-estimate” of the cost to your mortgage provider if you repay early. 

Is it a good idea to overpay on my mortgage?

If you’re able to make repayments on your mortgage over and above the agreed amounts, focusing on clearing the debt more quickly might seem like a good move and it can make a lot of sense to do so – but make sure you understand the terms of your agreement first.  

Overpaying on your mortgage means that: 

  • You’ll own your home outright sooner and enjoy the freedom that comes with that.
  • You’ll reduce the interest you have to pay over the term of the loan. 
  • You’ll reduce your loan-to-value (LTV) ratio, which is likely to give you access to better rates if you want to remortgage

The good news is that most mortgage deals with an early repayment charge also include an annual overpayment allowance (AOA) – an amount you can pay every year over and above the minimum repayments required.  

Other mortgages allow you to make unlimited overpayments – and this is often the case if you’re paying the lender’s standard variable rate (SVR) or have a lifetime tracker mortgage. 

Before you start overpaying your mortgage, you might want to prioritise paying off any other outstanding debts with much higher interest rates, such as those on credit cards.  

Read our guide to overpaying your mortgage to find out more. 

Can I get a mortgage without an early repayment charge?

You’re likely to find that most mortgages with low or fixed interest rates come with an early repayment charge. It’s the trade-off for the lender in return for offering you a good deal.  

For a chance of skipping the charge, some lifetime tracker mortgages will come up trumps, but your most likely option is a standard variable rate (SVR) mortgage. However, as well as the upside of no early repayment charges, you’ll have the downside of a potentially higher interest rate for the remainder of the mortgage term.

Frequently asked questions

How can I avoid charges when I’m overpaying on my mortgage?

To avoid early repayment charges, make sure that you: 

  • understand the terms of your mortgage agreement and the conditions that apply to early repayment charges – your lender should explain anything to you that’s not clear. 
  • stay within your annual overpayment allowance. 
  • pay attention to the early repayment deadline and know when the ERC may no longer apply.

An alternative is to look for a mortgage without early repayment charges. 

What’s an early repayment charge waiver?

If you’re unhappy that your mortgage provider has applied an early repayment charge – for example, if you think it’s too much, unfair or you weren’t told about the charge in advance – you can make a complaint.  

Your lender must have the opportunity to put things right and they’re usually obliged to give you their final decision on the matter within eight weeks of you making the complaint.  

If they decide in your favour, they can waive or refund some, or all, of the early repayment charge and may also pay compensation for any additional costs. 

If they don’t uphold your complaint, you have the option to take the matter further with the Financial Ombudsman Service

How do I avoid early repayment charges if I’m moving house?

When you move house, there are two mortgage options with different implications when it comes to early repayment charges.  

Porting your existing mortgage across to the new property  

When you move house, porting a mortgage means taking your existing mortgage with you.  

Porting a mortgage generally avoids having to pay early repayment charges, but this could depend on your provider and mortgage arrangement.  

Remortgaging with your current lender or a new mortgage provider 

If you’re remortgaging, whether you’ll have to pay an early repayment charge will depend on the terms of your current mortgage and the rules around any tie-in period.  

If you’re not sure whether to port your existing deal or remortgage, speak to a mortgage adviser. They’ll be able to work out which is most cost-effective, taking into account any early repayment charges that may be payable. 

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