Mortgage early repayment charges explained
Paying off your mortgage early can save you money in payments and interest but there may be fees to pay.We explain how early repayment penalties work and how to avoid them.
Key takeaways
An early repayment charge (ERC) is a fee for ending a mortgage deal before the term ends
You may be charged 1% to 5% of the remaining loan
To avoid ERCs, consider staying on a standard variable rate (SVR) for a short period after your deal ends or plan your remortgage to coincide with the end of your mortgage deal
You can usually repay around 10% of the outstanding balance per year, exceeding this may incur ERCs
When you're looking to save money on your mortgage, switching to a cheaper mortgage deal can make financial sense if you can get a lower interest rate.
Yet 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 ERC is essentially a fee for ending a mortgage deal early, such as leaving a three-year fixed rate deal after just one year. It's not just about switching; ERCs can also apply if you decide to pay off a large part of your mortgage to reduce your borrowing.
Lenders impose these charges because they lose out on the expected interest income when loans are paid off prematurely.
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.
When might an early repayment charge be applied?
There are several scenarios where you might find yourself facing an ERC:
If you switch to a new mortgage deal before your current one ends, you'll likely incur heavy fees
Downsizing or transferring your mortgage to a less expensive home can trigger an ERC if you're still within the terms of a deal
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.
If there's a gap between selling your old home and buying a new one, you might be charged an early repayment fee. However, this fee could be refunded if the next purchase is completed within a specified timeframe.
Reasons for mortgage early repayment charges
You remortgage too early
You move to a cheaper property
You’re selling up
Your new home purchase is delayed
How much does an early repayment charge cost?
The cost of an ERC is based on the outstanding mortgage amount and the point at which you are in your deal. Typically, ERCs range from 1% to 5% of the remaining loan, and this percentage tends to decrease each year you're into the deal.
For example, a £200,000 mortgage could cost you £10,000 in ERCs in the first year but only £2,000 in the fifth year. It's worth noting that the smaller the outstanding amount, the lower the ERC, which could also mean a saving on interest in the long run.
Can I avoid an early repayment charge?
While some mortgage products come without ERCs, they often carry higher interest rates. If you need flexibility, staying on an SVR for a short period after your deal ends can help you avoid these charges.
However, it's usually best to plan your remortgage or property sale to coincide with the end of your mortgage deal to sidestep ERCs altogether.
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?
Overpaying your mortgage can save you money as it reduces the term of the loan. You save money in repayments and also interest.
Many mortgages come with a penalty-free overpayment allowance, which is typically around 10% of the outstanding balance per year. If you overpay beyond this allowance, you may find yourself liable for ERCs.
This doesn’t mean you shouldn’t overpay your mortgage, but you will need to calculate the savings you are making when compared to the fee you’ll be charged.
Can I get an early repayment charge refund?
If you believe you've been unfairly charged an ERC, or if there are extenuating circumstances, you can lodge a complaint with your lender. They have up to eight weeks to respond to your concerns.
Should you remain unsatisfied with their resolution, you can escalate your complaint to the Financial Ombudsman Service. In some cases, this can lead to a partial or even full refund of the ERC.
Our other useful guides
Compare mortgages with MoneySuperMarket
Understanding mortgages and ERCs can be daunting, but MoneySuperMarket is here to help. They offer a comprehensive comparison of mortgage deals from over 90 UK lenders, providing you with all the necessary details on interest rates and fees to help you find the right mortgage for your circumstances.
Switching mortgage deals can be a smart financial move, but it's important to be aware of the potential costs involved. By understanding early repayment charges and how they work, you can make informed decisions that could save you money in the long run.
Whether you're looking to remortgage, sell your property, or simply reduce your borrowing, make sure you consider the impact of ERCs on your finances. With careful planning and the right advice, you can navigate the mortgage market to your advantage.
You can also use our mortgage repayment calculator to work out what your repayments will be and find out how much you can borrow using our mortgage affordability calculator.
Your home may be repossessed if you do not keep up repayments on your mortgage.
