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

Changing to a new mortgage deal can sometimes result in an early repayment charge (ERC) from your lender.

This happens if you want to remortgage before the early repayment period has elapsed.

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 too early.

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

For example, a two-year fixed rate mortgage might charge you an ERC if you try to remortgage within three years. This might require you to spend at least a year on the lender’s standard variable rate (SVR) unless you are willing to pay the charge.

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 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.

Learn more: how to find the best tracker mortgage

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

You can’t avoid paying the ERC unless you wait until your mortgage deal ends and no fee applies.

However, if the ERC is lower than the interest rate on your current deal or if you’re switching to a cheaper mortgage, you may find that, over time, the lower interest rate outweighs the cost of the ERC.

In either scenario it’s worth doing some sums to work out if you'll be better off.

In most cases, the lowest cost option is simply to wait until the early repayment period expires, even if this means spending a short time on an SVR mortgage.

Another option is to find a mortgage where the ERC only applies up to the end of the deal period (so you never have to go onto SVR).

If you are remortgaging, make sure your new deal doesn’t start until the end of your current deal’s tie-in period, otherwise you will be charged.

If you are moving home, you may be able to avoid the ERC by mortgage porting. This is where you take your current mortgage with you to your new property, so you’re not actually leaving your deal.

It isn’t always possible to port your mortgage, and whether you can or not will also depend on your circumstances, but a mortgage broker can help you work out the most cost-effective options.

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.