Early repayment charges – how are they calculated and when are they applied?
If you take out a low cost fixed rate, tracker rate or discounted rate mortgage then it is likely that your chosen product will come with 'early repayment charges'.
An early repayment charge is a fee that you may pay if you decide to repay some or all of your mortgage before the specified end date of your fixed or discounted rate deal. In some cases it can run into several thousand pounds and so it is important that you know how early repayment charges work before you commit to a mortgage deal.
Our guide tells you everything you need to know.
Why do lenders levy an early repayment charge?
Lenders finance the cost of mortgages in a number of different ways.
For a fixed rate, a lender might borrow a large sum of money on fixed terms on the money markets in order to lend this to their customers in the form of mortgages. If you repay your mortgage early, your lender will be left with a fixed rate sum to pay which may involve some costs.
If you take out a discounted rate, the lender may offer a special product on the basis that it will be able to fund the discount by keeping you on their standard rate for a period after the discount has finished. If you pay off the mortgage early, the lender may again incur a cost.
How is the early repayment charge calculated?
In most cases, the early repayment charge is calculated as a percentage of the amount you want to repay.
For example, if you want to repay all of your £100,000 mortgage and the early repayment charge is 4%, the charge will be £4,000.
In some cases the early repayment charge decreases over the term of your product. For example, you may pay a higher charge for repaying the loan in the first couple of years and then a reducing amount until the expiry of your fixed/discounted deal.
When are early repayment charges applied?
Early repayment charges are typically applied when you repay part or all of your mortgage within the specified term of the fixed or discounted deal. Circumstances where this may happen include where:
- You sell your home and repay your mortgage
- You move home and want to take out a mortgage on the new property with a different lender
- You make a significant capital repayment to your mortgage (perhaps through a savings maturity or an inheritance)
- You switch to a different mortgage product with the same lender
If you take a fixed rate you will generally find that the early repayment charges will be applied if you repay part/all of your mortgage within the fixed-rate period.
For a discounted rate the early repayment charge will generally be for a specified number of years.