An early repayment charge is one cost relating to your mortgage that feels particularly galling to be hit with. But what exactly are these charges, when might they apply and – most importantly – how can you avoid paying them?
What is an early repayment charge?
Mortgage deals, whether they are on a fixed or variable rate almost always come with tie-ins that last for the length of the term. For example, a three-year tracker mortgage will come with three-year tie-ins while a five-year fix will come with five-year tie-ins.
The tie-ins are effectively a trade-off in exchange for the lender offering favourable interest rates attached to the deal.
But if you ‘break’ this agreement and repay all or just a part of your mortgage back before the agreed term, early repayment charges will apply.
How much do early repayment charges cost?
Mortgage early repayment charges are charged as a percentage of the outstanding mortgage balance – usually between 1% and 5%.
The charges are often tiered which means they reduce with each year of the deal. A typical charging structure for a five-year fix for example, might be 5% in year one; 4% in year two; 3% in year three; 2% in year four, and 1% in year five.
In this case, if you had a £200,000 mortgage debt, it would cost you £10,000 to pay it off in year one of the fix but only £2,000 in year five.
Under Financial Conduct Authority (FCA) rules, your mortgage agreement must express early repayment charges as a cash value. But you can also use our mortgage overpayment calculator to get an idea of how much you could pay.
Can I make overpayments on my mortgage?
The good news is that most mortgage deals allow you to repay 10% of your outstanding loan back every year penalty-free – that’s an extra £20,000 on a £200,000 mortgage over and above your agreed monthly repayments – but check the small print of your mortgage agreement to be sure.
If you make overpayments greater than this, early repayment charges apply to the ‘disallowed’ slice of overpayment.
For example, if on the same £200,000 mortgage, you were to overpay by £30,000 in year one of your five-year fix, you would be charged 5% of £10,000 – or £500 – for doing so.
When might early repayment charges apply?
Being faced with early repayment charges because you suddenly have the cash to pay off your entire mortgage would be a nice problem to have. However, there are some more common scenarios in which you may find yourself facing mortgage early repayment charges.
You’re moving – and the new property is cheaper: When you move, you can usually ‘port’ your existing mortgage deal (i.e., take it with you) to the new property. Because this means you remain within your deal, you will avoid early repayment charges.
However, if you are taking a step down the property ladder, you may be in a position to pay back some of what you owe to the mortgage lender.
If this repayment exceeds 10% of your annual penalty-free allowance and you are tied into your mortgage deal, early repayment charges will apply.
You are forced to redeem your mortgage: As porting your existing mortgage involves the lender underwriting the whole loan again, it may be that it refuses to port your mortgage to your new property.
It could be that the new property is outside the bank’s lending remit – it’s of an unusual construction or has a thatched roof for example.
In cases like these you may consider it worth absorbing the early repayment charges with your current lender and seeking out a new one who is willing to offer you a mortgage on the new home.
You are forced to sell up: In some situations – such as divorce, a move abroad or unforeseen financial difficulty – you may be forced to sell up and pay off the mortgage much earlier than you anticipated when you took the deal.
You remortgage too early: Remortgaging is when you actively switch lenders to find a better deal when your current one comes to an end. But if the completion date you give is too early – even by a day – and your mortgage is redeemed, you could be whacked with early repayment charges. Make sure you always double-check the exact date your tie-ins end.
You’ve sold but your purchase is delayed: In some circumstances, there may be an unavoidable delay between when you sell your current property (and the mortgage debt is paid back to the lender) and when you buy the next one.
In this scenario, while you will need to cough up the early repayment charges upfront, many lenders will fully or partially refund them when you come to buy the new property so long as it's within a three- to six-month grace period.
How do I avoid early repayment charges?
Lenders’ standard variable rates – the central ‘go-to’ rate they charge when you come to the end of a deal – are expensive, but they do not come with tie-ins or early repayment charges.
If you know you may be moving in the near future or you plan to pay off a chunk of your mortgage with an anticipated windfall, it can make sense to stick with this rate for the flexibility it will offer you.
This is especially the case with smaller mortgage balances where the higher interest rate will have less of an impact. Some lifetime tracker deals also come with no tie-ins. If you are unsure, speak to an independent fee-free mortgage broker. Find out more at our mortgage advice page.