What is an Early Repayment Charge (ERC) on a Mortgage?
An Early Repayment Charge (ERC) is a penalty charge that your existing mortgage lender may charge you if you end your current mortgage deal early. It’s important to understand whether your current deal has an ERC, how much it would be, and until what date it would be payable when looking to move home.
How Much is a Typical Early Repayment Charge?
The amount of an Early Repayment Charge will vary depending on your mortgage agreement, term remaining on the product, and the lender. Typically, ERCs are calculated as a percentage of the outstanding mortgage balance. Although some lenders will charge the same amount throughout the whole product term, the percentage often decreases over time as you approach the end of the ERC period.
Here is a typical example:
| Years Remaining on Product | ERC |
|---|---|
| 5 | 5% |
| 4 | 4% |
| 3 | 3% |
| 2 | 2% |
| 1 | 1% |
When Do Early Repayment Charges Apply?
Early Repayment Charges apply when you repay your mortgage early, either by paying it off in full or making substantial overpayments. The specific timeframe during which ERCs apply is stated in your mortgage agreement. It’s important to review your mortgage terms to understand when ERCs come into effect.
Can I Get a Mortgage Without an ERC?
Yes, here at The Mortgage Pod, we have access to some mortgage products that offer the flexibility of no Early Repayment Charges. These mortgages are often suitable for those who anticipate the possibility of repaying their mortgage early or making significant overpayments. An example of a product likely to have no ERC is a tracker rate mortgage.
What to Expect When You Are Charged an ERC
When an Early Repayment Charge is applied, you can expect to receive a notice from your lender detailing the amount you owe. This charge will be due in addition to any outstanding mortgage balance on redemption. It’s important to budget for this expense and consider it when evaluating the cost of repaying your mortgage early.
How Much Can I Overpay Without an Early Repayment Charge?
The amount you can overpay without incurring an Early Repayment Charge depends on your specific mortgage lender and terms. Some mortgages offer an allowance for overpayments within a specified limit, often expressed as a percentage of the outstanding balance. Exceeding this limit may trigger an ERC. A typical overpayment allowance on a fixed-rate mortgage is 10-20% of the outstanding loan amount.
Can an Existing Early Repayment Charge Be Added to My New Mortgage?
Yes, if you are remortgaging to a new lender, you may be able to borrow more on your new mortgage to cover the balance of your existing mortgage that is to be redeemed, as well as the Early Repayment Charge (ERC) that will become payable. There will be disadvantages to including the ERC in your new mortgage, so it will be important to ensure you make an informed decision.
When Might an Early Repayment Charge Be Applied?
An Early Repayment Charge may be applied if you:
- Sell your property
- Remortgage to another lender
- Switch to a different mortgage product within your current lender
- Make significant overpayments beyond the allowed limit
It’s crucial to be aware of these situations to avoid unexpected charges. Our team is happy to help you establish if this will apply to you. Get started here.
Can I Get an Early Repayment Charge Refund?
If you decide to move to a new property and transfer your existing mortgage, also known as porting, there might be a period between selling your current property and purchasing the new one. In this scenario, lenders will allow a porting window, which means that if you complete the purchase of the new property within their specific timeframe—such as 180 days from the sale—you may be eligible for a full ERC refund.
How to Avoid Paying an ERC When Moving House
If you’re moving home, you can plan around your existing ERC date by listing your property 4–5 months in advance and setting clear expectations with both your buyer and seller regarding your preferred completion date. However, this can be challenging.
Porting: If your fixed rate doesn’t align with your move, porting your mortgage may be a good option to avoid an ERC. Learn more about porting here.
Can I Avoid Paying an ERC When I Remortgage?
To avoid paying an Early Repayment Charge (ERC) when remortgaging, timing is crucial. At The Mortgage Pod, we work closely with you, your lender, and your solicitor to ensure your remortgage completes on your preferred date, helping you avoid the ERC and limit time spent on the lender’s Standard Variable Rate (SVR). For example, if your current mortgage has an ERC until December 31st, aim to complete on January 1st, but keep in mind that completions cannot happen on weekends or bank holidays, so plan accordingly. Get started today!
What is a Mortgage Closure Fee?
A redemption fee (also called an exit or mortgage discharge fee) is an administrative charge when you repay your mortgage or remortgage. This is separate from an Early Repayment Charge (ERC) and covers the cost of closing your mortgage account. Fees typically range from £30 to £225, depending on the lender. Be sure to review all fees in your KFI or ESIS document before proceeding.
FAQs
What is an Early Repayment Charge on a mortgage?
An Early Repayment Charge (ERC) is a penalty for ending your mortgage deal early. Before moving home, it’s important to know if your deal includes an ERC, its amount, and the date it’s payable.
Do I have to pay an Early Repayment charge If I move home?
This will depend on your current mortgage lender, product and terms and conditions. Feel free to contact our team here at The Mortgage Pod for help understanding this.
Can you get a fixed rate with no Early Repayment Charge?
Yes, although not many lenders offer them, these deals do exist. Expect a higher interest rate compared to a fixed rate with an ERC.
