A Guide to Early Repayment Charges
Whether you are looking to get a new mortgage, or pay off one you have now, it’s important to understand if you will be affected by an early repayment charge.
Read on to learn what an early repayment charge is, how much you might need to pay, and if there’s any way to avoid it.
Early Repayment Charges, ERCs, early exit fees or early redemption penalties. These can apply to nearly all mortgages where you are not paying the lenders Standard Variable Interest Rate (SVR).
They are most commonly found in fixed rate mortgages and trackers. But what exactly is an ERC and who needs to pay it?
ERCs can run into thousands of pounds, they aren’t paid by everyone and in some cases can be avoided.
Our guide explains what they are and how they could affect you.
What is an Early Repayment Charge (ERC)?
An early repayment charge, or ERC, is a penalty charged by your lender when you repay some or all of a mortgage earlier than agreed.
ERCs are attached to your mortgage interest rate, not your mortgage account.
So you may stay with the same lender for many, many years. But each time you switch to a new interest rate with them, a different early repayment fee will apply.
Usually the charge applies to fixed interest rates and deals with introductory periods.
If you sign up for a fixed rate for 5 years and then decide to pay off the mortgage before the 5 years are up, the lender will charge you for repaying early.
ERCs are always shown on your mortgage quotes and your mortgage offer.
Why lenders have these charges
Mortgages are sold with the expectation that lenders will earn a certain amount of interest over the life of the product (fixed/tracker etc).
So if you choose a 2 year fixed rate, the lender knows what payments to expect from you over that 2 year period.
When a borrower pays off a mortgage early, the lender misses out on some of that anticipated interest income. ERCs help to recoup some of this lost revenue.
We make these charges because when setting up the funds to provide loans to customers, we expect them to keep the money for the time agreed at the outset. There is a cost to us if they repay some or all of the loan sooner. The charge is designed to compensate us for this cost.
Halifax
When you have a fixed rate mortgage with us, we’re expecting that the money you’ve borrowed is kept on that rate until the end of the fixed rate period. So, if you change your rate, repay your mortgage, or repay more than your annual overpayment allowance during that period, there’s a cost to us. The early repayment charge compensates us for this.
HSBC
You will pay an ERC when
You repay all, or part, of a mortgage before the end of the early repayment charge period.
There are four ways to fully repay a mortgage:
Cash
If you’ve saved up enough money, or had a windfall, then you have the opportunity of clearing your mortgage.
Remortgage
Remortgaging involves moving your mortgage over to a new lender, effectively repaying it.
Moving home
If you arrange a moving home mortgage with a new lender then this involves fully repaying the old mortgage.
Sale of property
Selling your home (without moving) automatically means that the mortgage debt needs to be paid off. This could be caused by; getting divorced, ill health or financial difficulty.
Any of these options can trigger a lender to enforce their early repayment fees.
You can avoid an ERC by
Understanding how your current mortgage works, and taking note of the date that any early exit fees cease to apply.
Overpayments
Making overpayments means that you are paying more each month than the lender is expecting. This is a convenient way of gradually making the balance reduce a bit quicker. Some lenders will allow a certain level of overpayments without making a charge, others will incorporate it in to the 10% annual allowance.
Lump sum repayment
Nearly all lenders allow their borrowers to repay (overpay) up to 10% of the mortgage each year, without charging ERCs. The 10% allowance is on top of your normal monthly payments. So each year you could make a lump sum repayment of 10% without worrying about expensive fees. And as your mortgage balance has now reduced, your monthly payments will also go down!
Moving home
To avoid ERCs when moving home you need to take your mortgage with you! This is a popular option and is called ‘porting’ a mortgage. In effect you take the special interest rate with you, thus there’s no fees to be charged as you haven’t repaid the loan.
Remortgaging
Remortgaging is when you switch your mortgage over to a new lender. The only way to avoid early repayment fees is to know exactly when the fees end, and time the start of the new mortgage accordingly. Your mortgage broker will be happy to do this for you.
How does the 10% allowance work?
A lot of lenders now allow borrowers to make overpayments, or extra payments, without having to pay the ERC penalty.
Each mortgage will have it’s own conditions, but typically you can make ‘extra’ repayments of up to 10% of your mortgage, each year, without being penalised.
So if your mortgage is for £250,000, you will be able to send the lender £25,000 extra to reduce the balance and they won’t charge you an early repayment fee.
The 10% is on top of your normal monthly repayments.
This is an important allowance and is a great way of putting extra money towards the mortgage debt.
There’s just two things to watch out for
10% of what?
The devil’s in the detail!
Can you repay 10% each year of the mortgage balance, or 10% each year based on the amount that you originally borrowed?
The answer is it depends… on your lender.
Each has their own meaning, so it’s really important that you find out how your mortgage works.
What does each year mean?
Is it the calendar year, January to December? Or it is the mortgage year, which started when your mortgage was initially opened?
Again, the answer depends on the lender.
Some work on a calendar year and some work on a mortgage year. Dig out one of your mortgage statements to learn when your mortgage year is.
What the lenders say
| LENDER | 10% OF | ERC YEAR |
|---|---|---|
| NATIONWIDE | ORIGINAL LOAN AMOUNT | MORTGAGE |
| HALIFAX | BALANCE ON 1ST JAN | JAN-DEC |
| TSB | BALANCE ON 1ST JAN | JAN-DEC |
| VIRGIN | BALANCE ON 1ST JAN | JAN-DEC |
| SANTANDER | BALANCE ON 1ST JAN | JAN-DEC |
| THE MORTGAGE WORKS | ORIGINAL LOAN AMOUNT | MORTGAGE |
What happens if you go over the 10% limit?
Before we explain what happens, it is important to remember:
The 10% pa allowance is on top of your regular monthly payments.
Let’s use a quick example:
You have a mortgage of £250,000 and the lender allows you to repay up to 10% of this amount each year, without penalty. The ERC is 5%.
£250,000 x 10% = £25,000 per year.
So what would happen if you paid off an extra £35,000 one year?
Well you are allowed to repay £25,000 without penalty. The ERC is due on the amount of money overpaid in excess of the 10% allowance.
£35,000 – £25,000 = £10,000.
You have paid £10,000 more than the allowance. An ERC of £500 would be payable:
£10,000 x 5% = £500.
Do all mortgages have these fees?
No, not all mortgage deals will have early repayment charges.
The ones that do tend to have a special interest rate for a set period. So for example:
- 5% fixed for 3 years
- 0.50% discounted rate for 5 years
The deals that don’t tend to have penalties are:
- The lender’s standard variable rate (SVR)
- The lender’s standard base rate tracker
When mortgage rates are advertised any early exit fees will also be included. Also, they will be very clearly shown in your mortgage illustration/quote.
What is a Mortgage Illustration?
Is a mortgage illustration the same as a mortgage offer?
Are they the same as mortgage exit fees?
No, Early Repayment Charges (ERCs) and mortgage exit fees are not the same.
ERCs are fees you might have to pay if you overpay on your mortgage or pay off your mortgage early. On the other hand, mortgage exit fees, also known as discharge fees or deeds release fees, are charges you may need to pay to your lender to cover the administrative costs of closing your mortgage once you’ve paid it off.
Professional mortgages
Some lenders offer an exclusive range of mortgages for ‘professionals’. These tend to be professions that require a high level of education and/or training.
The main advantage is that they lend professionals more money, when compared to a ‘normal’ job.
They can also offer a higher annual overpayment limit. Rather than the standard 10% per annum, many lenders offer overpayments of up to 20% per annum, without penalty.
Mortgages for professionals
Securing a mortgage can be a challenging process, but if you are a professional with qualifications and a stable income, you could be eligible for mortgages designed specifically for certain occupations.
Typically, this includes solicitors, accountants, doctors, and others who are viewed as having stable, high-earning professions.
Your status as a professional may grant you access to exclusive rates or bespoke deals that general mortgage products don’t offer.
How much do you need to earn for a £500,000 mortgage?
Buying a home is a major financial decision, and one of the most important considerations is how much you can afford to borrow. In this article, we’ll explain how lenders assess affordability and how to estimate how much you need to earn for a £500,000 mortgage.
How much are early repayment charges?
ERCs vary from lender to lender and deal to deal.
Broadly, these fees are 1%-5% of the amount repaid early. In our example above the ERC was only chargeable on the excess part of a lump sum repayment.
But if you repay the whole mortgage early, then the fee is charged on the entire balance.
Here are just a few examples of early repayment charges for different interest rate deals.
Virgin Money – 4.82% fixed 6 years
Early Repayment charges: £99, plus (3.5% for 6 years)
ERC payable*: £10,599
Nationwide BS – 5.24% fixed 2 years
Early Repayment charges: £65, plus (3% in year 1, 2% in year 2)
ERC payable*: £9065
Vernon BS – 5.35% discount 3 years
Early Repayment charges: £155, plus (3% in year 1, 2% in years 2-3)
ERC payable*: £9155
Yorkshire BS – 5.54% tracker 2 years
Early Repayment charges: £90, plus (1% in year 1, 0.5% in year 2)
ERC payable*: £3090
* Costs given as a guide only. Max ERC in Year 1, £300,000 mortgage.
How does porting work?
‘Porting’ a mortgage means moving home and taking your mortgage, and your interest rate with you.
Because you haven’t paid the mortgage off early, there’s no ERCs to worry about.
To avoid ERCs altogether when moving home you will need to:
- Borrow at least as much as you owe now (or more)
- Sell and buy on the same day
Porting availability
Not all lenders and all deals have a ‘portability’ option included. So before making plans you need to establish what your lender will do.
Eligibility
To port your interest rate means applying for a new mortgage with your current lender, requesting that you use the same interest rate deal.
In addition, you will have to pass the lender’s eligibility and affordability criteria.
The property you want to buy is also very important and it needs to be acceptable to your lender. Problems could arise where you wanted to buy a property of non-standard construction, an ex-council house, or perhaps a property near commercial businesses.
What does non-standard construction mean?
You will find more useful information in our article: How does porting a mortgage work.
How can you avoid paying early repayment charges?
Knowing what you can, and cannot, do with your mortgage is really important.
To avoid ERCs means understanding when they apply and what exclusions, if any, there are when making mortgage overpayments.
- You could just choose a mortgage deal that doesn’t have any of these fees
- Overpay within your limits
- Port your mortgage if you move home
- Wait until the ERC period is over before making any changes
Unfortunately, these black and white suggestions don’t take into consideration the variables of life!
Many people are forced into paying high early repayment fees because they have to make changes before the charging period is over. Often this is due to divorce, or separation, where a transfer of equity mortgage is needed. Maybe the home needs to be sold due to financial hardship and the proceeds used to repay debts.
In these situations it is important to discuss your problems with your lender, to see how any charges can be reduced.
A Guide to Mortgage Fees
Understanding mortgage fees can be tricky. Our guide is here to help, making it easy to grasp each cost you might face. With our clear explanations, you’ll be better prepared and confident when buying your home.
