If you have a mortgage, you might be thinking about paying it off early or switching to a better deal. But before you do, it’s important to check if your lender will charge you an early repayment charge (ERC).
What is an early repayment charge?
An ERC is a fee that some mortgage lenders charge if you pay off your mortgage earlier than agreed. This could happen if you:
- Pay off the mortgage in full before the end of the deal period
- Remortgage to a different lender before your fixed or discounted period ends
- Overpay beyond the lender’s allowed limit
Lenders apply ERCs because they expect to earn interest from your mortgage over a set period. If you repay early, they miss out on that interest, so the charge helps them recover some of the lost money.
ERCs can be expensive, so it’s important to understand when they apply, how much they might cost, and whether it’s worth paying them.
When do early repayment charges apply?
ERCs don’t apply to every mortgage, but they are common with:
- Fixed rate mortgages – usually for the length of the fixed term (e.g., 2, 3, 5, or 10 years)
- Tracker mortgages – some lenders include an ERC if you leave before the agreed term ends
- Discount mortgages – similar to trackers, some come with an ERC for early exit
You’re most likely to face an ERC if you:
- Repay your mortgage in full – for example, if you sell your home or come into money and want to clear the debt
- Remortgage before your deal ends – switching to a different lender while you’re still within your fixed or discounted period
- Overpay too much – many lenders let you overpay up to a certain amount (often 10% per year) without penalty, but going over this limit can trigger an ERC
ERCs usually stop applying once you move onto your lender’s standard variable rate (SVR) after your fixed or discounted period ends. They can also stop applying within the last few months of your term, but it’s always best to check your mortgage agreement or speak to your mortgage broker.
How much are early repayment charges?
ERCs can be expensive and vary from lender to lender. They are usually charged as:
- A percentage of the remaining loan, often between 1% and 5%
- A fixed fee, although this is less common
Examples of ERC costs
The amount you pay depends on how much is left on your mortgage and the ERC percentage.
- 5% ERC on a £200,000 mortgage = £10,000 charge
- 3% ERC on a £150,000 mortgage = £4,500 charge
- 2% ERC on a £100,000 mortgage = £2,000 charge
Some lenders reduce the ERC over time. For example, if you have a 5-year fixed deal, the charges could be:
- Year 1: 5%
- Year 2: 4%
- Year 3: 3%
- Year 4: 2%
- Year 5: 1%
This means the longer you wait, the less you might have to pay.
Ways to avoid or reduce early repayment charges
ERCs can be costly, but there are ways to avoid or minimise them:
Check your mortgage terms before signing
Before taking out a mortgage, check if it has an ERC and how long it applies. Some lenders offer ERC-free deals, especially on tracker or variable rate mortgages.
Choose a mortgage with flexible repayment options
Some mortgages allow you to overpay more without penalty. If you think you might want to make large overpayments or repay early, look for a deal with higher overpayment allowances or no ERCs.
Time your repayments carefully
If you’re nearing the end of a fixed term, it might be better to wait until your deal ends before making changes. Most ERCs expire once you move onto the lender’s standard variable rate (SVR).
Port your mortgage when moving home
If you’re moving house but still in your deal period, some lenders let you port your mortgage to the new property. This means you keep your current deal and avoid the ERC.
Is it worth paying an early repayment charge?
Sometimes, paying an ERC can still save you money, especially if you’re switching to a much better mortgage deal.
When it might make sense to pay an ERC
Lower interest rates
If a new mortgage offers a significantly lower interest rate, the savings could outweigh the ERC.
Debt consolidation
If repaying your mortgage early will save you more on other high-interest debts, it could be worth considering. However, it must be remembered that securing previously unsecured debts can put your property at risk if you do not keep up with the repayments.
Financial windfall
If you inherit money or get a big bonus, paying off your mortgage early might be worth the cost.
When it’s better to wait
- If the ERC is high and the savings from switching to a new deal are small
- If you’re close to the end of your fixed or discount period
Before making any decisions, always weigh up the cost of the ERC against the benefits of switching or repaying early. If you’re unsure, speaking to an L&C mortgage advisor who can help you find the best option for your situation.
