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Early repayment charges

Mortgage early repayment charges explained

published: 01 December 2022
Read time: 5 minutes

Paying off your mortgage early can be costly. Learn more about early repayment penalties and how to avoid them.

Switching to a better mortgage deal can make financial sense if you can get a lower interest rate. In some cases, it can save you thousands of pounds over the life of your home loan. But there could be a catch.

Most lenders will charge you extra fees if you break your mortgage deal early before the deal term ends. This is known as an early repayment charge (ERC). Our guide explains how ERCs work and what you can do to avoid them.

What is an early repayment charge?

An early repayment charge is a fee you might have to pay your lender if you want to end your mortgage deal before the ‘official’ deal term ends. For example, you have a three-year fixed rate deal with your lender, but you want to move to a lower fixed rate at the end of 12 months. If you were to switch away, your lender would make you pay an early repayment charge.

Early repayment penalty charges can also be applied if you want to pay off a chunk of your mortgage to reduce your overall borrowing.

Lenders charge early repayment fees because they’re expecting to make a certain amount of interest by lending to you on a fixed- or tracker-rate deal. So, paying off your mortgage earlier means they’ve lost money. This is why they’re passing on this charge to you.

An early repayment charge doesn’t usually apply if you’re paying your lender’s standard variable rate (SVR) and want to switch away. You may be charged an admin fee to leave your lender, but typically this will be less than a few hundred pounds. In contrast, ERCs could run into thousands.

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When might an early repayment charge be applied?

There are a number of scenarios where you might find yourself facing mortgage early repayment charges. These include:

  • You remortgage too early – if you switch to a new mortgage before the end of your current deal, it’ll come with heavy fees. This will be the case even if you make the change just one day too early. Make sure to double-check the exact date your mortgage deal contract ends

  • You move to a cheaper property – when you move home, you can usually transfer your existing mortgage deal. But what if your new place is cheaper? You’ll want to use the extra cash from selling your old property to reduce the size of your mortgage. But if you’re still tied into a deal, an early repayment charge could apply

  • You’re selling up – in some situations, like a separation or a move to a different country, you might need to leave your mortgage deal. Similarly, if you hit financial difficulties, you might decide to sell your property. However, fees will still have to be paid to close the mortgage if you are in the middle of a mortgage deal

  • Your new home purchase is delayed – if you’re moving up the housing ladder, there might be a gap between selling one home (including paying back the mortgage) and buying your next one. In these cases, your lender will charge you early repayment fees. But you’ll usually get a full or partial refund when you buy your next property, as long as it doesn’t take more than a few months

How much does an early repayment charge cost?

Early repayment charges aren’t usually a flat-rate fee. The cost will usually depend on how much you’ve borrowed (e.g. the size of your mortgage) and how far you are into your deal.

Early repayment charges are usually calculated as a percentage of the amount still outstanding on your mortgage. The typical amount is usually between 1% and 5%. Often, the cost depends on how far you are into your deal. On a 5-year fixed rate deal, for example, you’ll be charged 5% if you leave in your first year, 4% in your second, 3% in the third year, and so on.

By way of example, if you had a £200,000 mortgage, it would cost £10,000 to pay off the debt in the first year. But if you switched in year five, it would be less expensive at only £2,000.

This also means that an early repayment charge will be much lower if you’re closer to paying off your mortgage entirely. If you only have £10,000 outstanding, for example, a 1% ERC only comes to £100. If you have the cash, paying back your mortgage in full could therefore save you money on interest.

Is there any way to avoid an early repayment charge?

There are some mortgages that don’t come with an early repayment charge. So, signing up for one of those will mean that you can avoid paying any extra fees if you decide to break your mortgage. Keep in mind, though, that these are almost always standard variable rate or tracker mortgages, and the interest is usually much higher than you’d get on other deals.

Usually, people remortgage at the end of their mortgage deal to avoid being put on to their lender’s standard variable rate. This is because SVRs can be relatively high. But if you know you’ll be downsizing or selling up shortly, it might be worth sticking with your provider’s SVR for a month or two. This will give you extra flexibility and help you avoid repayment fees.

In most cases, however, it’s best to wait until your deal ends before getting a new mortgage to avoid paying ERCs.

Will I still be charged an early repayment charge if I overpay on my mortgage?

It depends on the lender and type of mortgage you’ve taken out. The good thing about repaying your mortgage over the agreed monthly instalments is that you will clear your debt sooner. But bear in mind that, unless your plan gives you a chance to make overpayments penalty-free, you will still be charged if you decide to pay off your mortgage early.

That said, there are many options on the market that, even though they charge an early repayment fee, will provide you with an annual overpayment allowance. This generally stands at about 10%. If you exceed this limit, it is likely that an early repayment charge will be applied to the extra amount overpaid.

Can I get an early repayment charge refund?

There are many reasons why you may be dissatisfied with how your lender has applied an early repayment charge. For example, you may feel that the penalty is unfair or too high. Or it may be that you were never told about this charge in the first place.

Whatever the case, if you’re unhappy, you can make a complaint. The lender will then need to review your complaint and provide you with their final say on the matter in the space of eight weeks.

If your complaint is rejected and you’re not convinced by the lender’s reasoning, you can take the issue further and inform the Financial Ombudsman Service. But if things go well and the lender agrees (at least in part) with your concerns, you can expect to be refunded some or all of the early repayment charge.

Compare mortgages with MoneySuperMarket

Whether you’re a first-time buyer looking for a mortgage or need to remortgage once your current mortgage deal ends, finding a good loan deal couldn’t be easier with MoneySuperMarket.

We compare results from more than 90 UK lenders across the market. Plus, we’ll show you the initial interest rate and any fees, so you can pick the mortgage that’s right for you.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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