When you take out a mortgage, you’ll have to make monthly payments for a certain number of years. However, sometimes you might want to pay off your mortgage early, either because you’ve come into extra money or simply want to reduce your debt. While this may seem like a good idea, it can trigger an early repayment charge (ERC). Understanding how early repayment charges work, why they’re applied, and how you can manage or avoid them is essential before deciding to pay off your mortgage ahead of schedule.
In this article, we’ll explain what an early repayment charge is, when it might apply, and most importantly, how you can avoid it.
How much is an early repayment charge?
The amount you’ll pay as an early repayment charge depends on several factors, including the terms of your mortgage. Generally, early repayment charges are calculated as a percentage of the loan balance you’re repaying early, and it could be as high as 5% or more. For example, if you have a £100,000 mortgage and your early repayment charge is 2%, you could face a fee of £2,000.
The exact percentage depends on your lender, the type of mortgage you have, and the stage of your mortgage deal. ERCs tend to be higher during the initial years of your mortgage term, particularly if you’re in a fixed-rate period. As your mortgage deal nears its end, the ERC will often decrease, making it less expensive to pay off the loan early.
When might you pay an early repayment charge?
An early repayment charge isn’t something that applies to every situation, but there are a few common scenarios where you might find yourself facing one:
You overpaid on your mortgage
If you decide to overpay your mortgage, you may trigger an early repayment charge. Most mortgage deals allow you to make overpayments up to a certain percentage (usually 10%) of your loan amount each year without incurring a fee. If you go beyond that limit, the lender may apply an ERC on the excess amount.
You remortgage to a cheaper deal or a new lender
When you remortgage to a new lender or switch to a cheaper deal with the same lender, you’re essentially paying off your existing mortgage early. In this case, you might be charged an ERC. It’s important to factor in this cost when deciding whether remortgaging is worth it, as it could reduce the savings you expect from securing a lower interest rate.
You have to sell your property
If you sell your property before the end of your mortgage term, you’ll need to pay off the outstanding loan. Depending on the terms of your mortgage agreement, this could trigger an early repayment charge. However, some mortgages have a clause that allows you to pay off the loan in full without penalty if you sell your home.
You redeem your mortgage
Redeeming your mortgage means paying off the full balance of your mortgage loan early. If you choose to redeem your mortgage before the end of your term, an ERC may apply. This is common if you’re paying off your mortgage because of a change in your financial situation or if you want to release some equity from your home.
Do all mortgages have early repayment charges?
Not all mortgages come with early repayment charges. Many lenders now offer mortgages with no ERCs, although these deals might come with slightly higher interest rates to compensate for the lender’s risk. If avoiding ERCs is a priority for you, it’s worth considering mortgages that offer more flexibility.
In addition to standard mortgages, some specialist mortgage products may also come with terms that don’t include early repayment charges. It’s important to read the terms and conditions of your mortgage agreement to understand whether an ERC will apply if you want to pay off your mortgage early.
How to avoid paying an early repayment charge
If you want to avoid paying an early repayment charge, there are several strategies you can use. Below are some of the most effective ways to prevent or minimise an ERC.
Get a mortgage with no early repayment charges
One way to avoid an early repayment charge is to choose a mortgage that doesn’t include any ERCs. Many modern mortgages offer more flexibility, allowing you to repay your mortgage early without penalties. If you’re looking for more freedom with your mortgage, speak to a mortgage broker about options that may fit your needs.
Overpay at the right time
Many mortgage deals allow you to overpay a certain percentage of your loan each year without incurring any fees. Typically, you can overpay up to 10% of your mortgage balance annually without triggering an ERC. Check your mortgage agreement to understand the overpayment rules, and if you’re looking to pay down your mortgage more quickly, do so within the allowed limits to avoid fees.
Move lenders at the right time
If you want to remortgage to take advantage of lower rates, timing is key. If you’re in the middle of a fixed-rate term, moving lenders could result in an early repayment charge. Wait until your mortgage deal is nearing its end to avoid the charge. You might also want to explore whether your current lender offers a deal that could allow you to switch to a new rate without penalty.
Port your mortgage
Some mortgages offer portability, which means you can take your mortgage with you when you move to a new property. This could help you avoid an ERC if you’re thinking of selling and buying a new home. However, not all mortgages are portable, so be sure to check the terms with your lender.
Avoid paying the Standard Variable Rate
The Standard Variable Rate (SVR) is typically higher than fixed rates and can increase at any time, so it’s a good idea to avoid reverting to this rate if possible. If you’re approaching the end of your fixed-rate deal, you might want to consider moving to a new deal or remortgaging to get a more affordable rate before the SVR kicks in.
Conclusion
An early repayment charge (ERC) is something you should consider before making any changes to your mortgage, especially if you’re planning to pay off your mortgage early, sell your property, or remortgage. While ERCs can be costly, understanding when and why they apply gives you the knowledge to plan ahead.
The key to managing or avoiding an ERC is to carefully evaluate your mortgage terms, make overpayments at the right time, and seek out flexible mortgage products that suit your needs. If you’re unsure about your current mortgage terms or need help understanding early repayment charges, it’s always a good idea to speak with a mortgage broker.
If you want to learn more about early repayment charges or how to redeem your mortgage, check out our Early repayment charge (ERC) and redeem your mortgage articles for more information.