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All You Need To Know About Early Repayment Charges

Posted 14 August 2023 by Andrea Dean

What are early replacement charges, are they worth paying and are there ways to avoid them? Find out here...

Ending your mortgage early or making overpayments to reduce the debt can incur financial penalties. With the help of mortgage experts, we examine when they’re worth paying – and how to avoid them.

What is an early repayment charge (ERC)?

This is a fee your mortgage lender might charge you if you pay off your mortgage before the end of a term or reduce the sum you’ve borrowed over a specified annual limit.

When could I be liable for a ERC?

You’ll face an ERC if you exceed the maximum amount you’re allowed to overpay on your mortgage. It will also apply if you remortgage before the end of your current deal – such as when moving house. Or, if you’re moving to a cheaper property and porting a mortgage (taking it with you) you might be able to repay the full amount owed out of the sale proceeds. However, an ERC could be charged if a fixed term’s yet to expire.

How much is an ERC?

This varies from lender to lender, so ask about the ERC when taking out a new mortgage. “Generally the longer the fixed rate, the higher the charge will be at the outset. Some banks have a flat ERC during the term of the product. Others will have an ERC that reduces year by year,” explained Adrian Anderson of Anderson Harris. “For example, with a five-year fixed rate, one bank may charge an ERC of 3% during the five-year term. Another lender may charge 5% ERC during year one, reducing each year to 1% in year five. So the ERC will be 5%, 4%, 3%, 2%, 1% during the five-year fixed rate.”

Can I make extra payments on my mortgage without incurring charges?

Most lenders permit overpayments but only up to a certain percentage of the outstanding balance each year. “This is commonly 10% of your balance, but some lenders allow as much as 20% a year,” said Thomas Jackson of Cooper Associates Mortgages. “If the start of the annual period, your mortgage is £100,000 you may be able to pay off as much as £20,000 without incurring any charges. Going forward, you would also stop paying interest on the amount paid.”

Do ERCs apply to all mortgages?

They are typically associated with fixed-rate mortgages as Claire Flynn at Confused.com Mortgages explained. “By signing up for a fixed-rate loan you commit to paying a prearranged interest rate for a set period. Throughout this fixed-rate duration, your interest rate remains unchanged, ensuring steadiness and predictability for your monthly repayments. Opting to repay the loan or mortgage before the fixed-rate period's completion may lead to ERCs. These charges serve to compensate the lender for the lost interest income they had anticipated earning.”

Standard variable rate mortgages – which are more expensive than fixed rate – and most tracker mortgages aren’t subject to ERCs, so bear these in mind if you’re anticipating a lump sum that will enable you to pay off your mortgage early.

When is it worth paying an ERC?

There are occasions when you’ll be better off repaying your mortgage, even taking the ERC into account. “Repayment fees are sometimes worth it if you’d find yourself saving more money in the long run. For example, if you have enough money in your savings pot to pay off the entirety of your mortgage and the additional repayment charges,” said Ben Thompson of Mortgage Advice Bureau.

However current high interest rates mean that paying an ERC simply to switch mortgages isn’t cost-effective. “It can be worth paying ERCs if you are moving onto a better mortgage rate but this is highly unlikely at the moment,” said Mark Harris of SPF Private Clients. “Calculate how much of a penalty you would have to pay and how much you would save being on a lower rate; in some instances it can be worth doing but in this higher-rate environment, it is unlikely to result in a cost saving.”

How do I avoid EPCs in the future?

Avoid moving before a fixed-term expires or port the mortgage if possible, and consider your long-term plans when taking out a new one. Find out how much lenders allow you to overpay, look into tracker or penalty-free variable mortgages, or opt for a shorter fix that gives more flexibility. “If you think you are going to repay the mortgage or more than 10% per annum during a certain timeframe, then try and avoid a product that is longer than this period,” said Adrian Anderson of Anderson Harris. “For example if you plan to repay the mortgage in two or three years’ time, try to select a two- or three-year fixed rate. If you are purchasing a home for the long term and do not have any intention of repaying the mortgage or more than 10% per annum the early repayment charge should not be an issue.”

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