Early repayment charges: what are they and can I avoid them?
Posted 20 November 2015 by Keith Osborne
If you have a fixed rate or discounted variable rate mortgage then it is possible that your deal is subject to 'early repayment charges' (ERCs).
These charges are typically payable if you want to repay your mortgage early and, in some cases, can run into thousands of pounds. So what are early repayment charges? Why do lenders charge them? And how can you avoid them?
What are early repayment charges?
If you pay off some or all if your mortgage early, you may face an early repayment charge (ERC). ERCs are typically part of the terms and conditions of a special deal. For example, if you take a five-year fixed-rate mortgage and you want to come out of the deal after two years, you will typically pay an ERC for doing so.
Why do lenders levy ERCs?
Lenders finance mortgages in different ways. Many borrow money at fixed rates on the wholesale money markets and then lend this to mortgage borrowers. If you then decide to repay the loan early, the lender has to support the sum they borrowed - and this may involve some costs.
When might I pay an ERC?
You may pay an early repayment charge if:
- You want to come out of a deal - If you want to switch from your current mortgage deal into a different product (even if you stay with the same lender) you will generally be charged for doing so
- You want to move home and use a different lender - If you want to move home part way through a fixed/discounted deal and take your new mortgage out with a different lender you'll generally pay an ERC
- You want to make a significant repayment - Most lenders will allow you to repay some of your mortgage capital every year (see next section) but if you repay a substantial lump sum you could face an ERC
How can I avoid early repayment charges?
There are several ways you can avoid paying an ERC:
- Choose a 'no ERC' deal - Some lenders offer flexible products with no early repayment charges. These will allow you to pay off some/all of your home loan at any time without an ERC
- Port your mortgage - If you are moving home and borrowing the same mount (or more), your lender may let you 'port' your mortgage deal. This means they will apply the same interest rate terms to the mortgage on your new property. Bear in mind that you will still have to go through the underwriting process with your current lender and they will still have to agree your new mortgage based on your current circumstances
- Pay up to your 'charge free' limit - Most lenders allow you to repay a certain percentage of your mortgage each year without penalty. Typically you can pay up to 10% of your mortgage every year - even if you're on a fixed/discount deal - and you will only pay an ERC if you make an overpayment above this amount
- Wait until your charge period ends - All ERC s have an end date. This is either a specific date – generally when your fixed rate ends – or a set period from the date your mortgage completed. Once you are past the ERC end date you should be able to repay part/all of your mortgage without charge