What Are Early Repayment Charges?
Early Repayment Charges (ERCs) are fees charged if you pay off or switch your mortgage before your agreed rate period ends. They compensate lenders for lost interest income when you exit a deal early. ERCs are usually expressed as a percentage of the outstanding mortgage balance.
For example, a 3% ERC on a £200,000 outstanding balance would cost £6,000. ERCs typically apply during fixed rate periods and some tracker deals, though not usually on SVRs.
How ERCs Are Structured
ERCs often reduce over the deal period. A 5-year fix might have 5% ERC in year 1, 4% in year 2, 3% in year 3, 2% in year 4, and 1% in year 5. Once the fixed period ends, ERCs no longer apply, even if you're on the SVR.
Some products have flat ERCs throughout (e.g., 3% at any point), while others have different structures. Check your mortgage offer document for your specific ERC schedule.
When Does It Make Sense to Pay ERCs?
Sometimes paying an ERC to switch to a better rate is worthwhile. Calculate the total cost of the ERC against the savings from a lower rate over your remaining intended stay. If savings exceed the ERC, switching could make financial sense.
This calculation is particularly relevant when rates have fallen significantly since you took your current deal, or if you need to remortgage for other reasons (releasing equity, consolidating debts, removing a party from the mortgage).
Avoiding ERCs
Most mortgages allow overpayments up to a certain limit (often 10% of the balance annually) without incurring charges. Use this to reduce your balance and potentially improve your LTV for better rates when you do switch.
Time your remortgage to complete after your ERC period ends. Starting the process 6 months before your deal ends typically allows completion without any overlap with ERC liability.
ERCs and Product Transfers
If you're moving to a new deal with your existing lender (a product transfer), ERCs might be waived or reduced. Ask your lender about your options - staying with them might allow rate improvement without the full ERC cost.
Our brokers can help calculate whether paying an ERC, waiting it out, or doing a product transfer offers the best value for your specific situation.