How do early repayment charges work and how can I avoid them?

Remortgaging or taking out a mortgage on a new home, can sometimes land you with a costly early repayment charge (ERC).

This happens if you want to remortgage before the early repayment period has elapsed on your current mortgage.

It may reduce or even eliminate the savings you could make by remortgaging, so it’s important to know what ERCs might apply to your mortgage if you want to switch deals.

What is an early repayment charge?

An early repayment charge (ERC) is a penalty your provider may charge if you overpay on your mortgage by more than they allow, or pay off the whole loan early before the end of the fixed or discount period.

Many deals have a tie-in period, which is often longer than the deal period itself.

If you are willing to pay the ERC, you may be able to choose whether to pay it up front or add it to your new mortgage if you are remortgaging. Bear in mind that you’d then pay interest on the ERC.

Your mortgage illustration will tell you whether your mortgage has an ERC attached and how much it would be. 

What is a typical amount for an early repayment charge?

An ERC is usually a percentage of the outstanding mortgage and typically between 1% and 5%.

Although 1% might not look like a huge penalty, it is still a lot if your outstanding balance is high (for example, 1% on a £200,000 loan is £2,000).

Sometimes the percentage reduces the longer you’ve had your deal, which is often the case for big high-street lenders like NatWest, Nationwide, Halifax, HSBC and Lloyds Bank.

Here’s an example:

You have £75,000 left to pay on your mortgage with a 2% ERC for the first year, which goes down to 1% for the following year.

If you repay or switch deals in the first year of getting your mortgage, you have to pay £1,500.

But if you repay or switch in the following year, you pay £750. If you wait until the third year, there is no ERC to pay.

Can I get a mortgage without an ERC?

There are some types of mortgages that don’t carry an ERC – they’re usually tracker or standard variable rate (SVR) deals.

However, your mortgage normally automatically switches to an SVR once your initial deal ends – remortgaging is often about avoiding the SVR, which can be a lot more expensive.

When you are on an SVR, the amount of interest you pay depends on the bank’s rate, meaning the amount you pay each month can go up or down.

Tracker mortgages work in a similar way but move up and down in direct response to changes in the Bank of England’s base rate.

A mortgage broker can help you find the more attractive mortgage deals out there that have no (or low) ERCs.

How can I avoid paying the ERC when I remortgage or move house?

Once you’ve taken out a mortgage that carries an ERC, you won’t be able to avoid it if you need remortgage during the  ERC period.

But, it may be possible to swerve the ERC before the end of your fixed rate, if you are moving house.

Many lenders will allow mortgage porting. This is where you take your current mortgage with you to your new property, so you don’t have to leave your current mortgage.

If your current deal isn’t portable, a mortgage broker, however, can help you work out the most cost-effective solution.

Be warned: some banks have charged ERC even if they repossess someone’s home.

The Financial Ombudsman Service does look into cases where people feel the ERC is unfair, so it might be worth getting in touch if this happens to you.

When is it worth paying an ERC?

For most borrowers it makes sense to wait until the ERC period comes to end before you switch deals.

But there could be some circumstances where it makes financial sense to pay the ERC.

These include:

• Moving to a mortgage with a much lower interest rate, where the savings will offset the cost of the ERC over time.

• If you’re remortgaging to consolidate debts with very high interest rates

If you aren’t sure whether it’s worth paying an ERC, it’s worth discussing it with a mortgage broker.

Seek expert mortgage advice

Understanding early repayment charges (ERCs) is crucial when considering a remortgage or moving home, as they can significantly impact the cost-effectiveness of switching deals.

While some mortgages come without ERCs, many fixed-rate deals include them, making it essential to check the terms before making changes.

In some cases, waiting until the tie-in period ends or porting your mortgage can help avoid unnecessary fees.

Given the complexity of ERCs and their financial implications, seeking advice from a mortgage broker can ensure you find the best deal while minimising costs.