Early repayment charge (A complete guide)
In this brief guide we are going to discuss what an early repayment charge is and how you can avoid an early repayment charge on your mortgage or a similar credit product.
What Is an Early repayment charge?
An early repayment charge (ERC) is a charge which a mortgage lender or a credit provider may charge you for paying the credit you borrowed before its due date. An early repayment charge could be levied when you make more than the contractual required monthly repayment or pay the credit back in full before the due date.
What is an early repayment charge for a mortgage?
For mortgages the early repayment charge will usually be a percentage of the mortgage balance and an early repayment charge will usually be placed on fixed rate mortgages during their fixed introductory phase (The term in which the mortgage rate stays the same).
For mortgages, an early repayment charge will be levied if you overpay your monthly mortgage repayment, make a large one off payment towards your mortgage balance or if you pay your mortgage balance in full before its due date.
Most mortgage lenders will allow you to make overpayment on your mortgage up to a certain percentile of your mortgage balance each year.
This means a mortgage lender could allow you to overpay your mortgage by 10% of the outstanding mortgage balance each year.
After this point, they will usually charge an early repayment charge.
Some early repayment charges will usually reduce as the term of your fixed rate introductory period draws to a close. E.g the early repayment charge may be 5% in year one of a 5 year fixed rate mortgage but then 4% in year 2 etc.
Example of an early repayment charge:
If you have a £200,000 mortgage balance and the early repayment charge was a fixed figure of 5% of the outstanding mortgage balance then your current early repayment charge if you wanted to leave your mortgage would be £10,000.
What types of mortgages charge early repayment charges?
The below types of mortgages will usually have early repayment charges:
- Fixed rate mortgages
- Offset mortgages
When will you need to pay an early repayment charge?
You will usually need to pay an early repayment charge when you want to remortgage on to a new mortgage lender or when you want to do a product transfer with the same mortgage lender (although some mortgage lenders will waive the early repayment charges when you do a product transfer).
You may also have to pay an early repayment charge if you want to port your mortgage when buying a new house but the mortgage lender may also decide to waive this early repayment charge.
You may also need to pay an early repayment charge if you partially port your mortgage to another property.
You will also need to pay an early repayment charge if you overpay more than your monthly required mortgage repayment or make a large sum mortgage repayment which is beyond what you are contractually obligated to repay per month.
Most mortgage lenders will have an amount in which they will let you overpay your mortgage by each month.
This could be10% of your total mortgage balance per year. You will then be charged an early repayment charge on anything you pay beyond the 10% per year.
Most mortgage lenders will also have some exemptions in which you won’t need to pay an early repayment charge,
E.g Nationwide or Halifax or Yorkshire Building society.
Should you pay an early repayment charge?
In some cases paying an early repayment charge may be worth it if the total savings made when switching your mortgage to another provider are substantial to you (even after including the cost of the early repayment charge).
The only way to avoid an early repayment charge is to not take on mortgage products which have these charges levied on them or avoid taking on mortgages which have early repayment charges levied on them for a long term.
An early repayment charge may stop you from being able to take advantage of a fall in mortgage rates and leave you stuck with a higher mortgage rate which costs you more per month in monthly mortgage repayments..
How do you pay an early repayment charge?
You will usually need to repay your early repayment charge in full to the mortgage lender but you could increase the mortgage amount which you are borrowing from your new mortgage to fund the payment of your early repayment charge on your old mortgage product (subject to eligibility)
You should be aware that increasing your mortgage in order to cover the cost of your early repayment charge will of course increase the cost of your mortgage and you may end up paying more in interest on your mortgage than you may see as being “worth it”.
To mitigate this you can overpay your mortgage once you can to reduce the potential increase in mortgage interest.
Have you been charged an unfair early repayment charge?
If you feel you have been charged an unfair early repayment charge then you should complain to the lender and if they do not give you a response which you are satisfied with then you can take your complaint to the financial ombudsman.
The financial ombudsman is an independent arbitrator who will look at your case and make a decision.
The financial ombudsman details are:
When looking at early repayment charge complains the financial ombudsman will usually look at complaints with themes such as:
“the early repayment charge (ERC) is unfair
the ERC is excessive, or wasn’t based on a reasonable pre-estimate of the cost to the lender of the mortgage being repaid early
the ERC wasn’t made clear to them when they took the mortgage out
they were misled about the ERC
their application to transfer the mortgage to another property was turned down, so they’ve had to re-mortgage elsewhere – and now the lender wants to charge an ERC
paying an ERC is unfair after their house was repossessed and sold
the ERC should be refunded because of their circumstances”
If you think any of the below then you may have a case which the financial ombudsman could look at:
“you think the charge is unfair or too much
your lender didn’t tell you about the charge when you took out the mortgage
you weren’t told about the charge when you asked your lender about paying off some (or all) of your mortgage
your lender turned down your application to transfer your interest rate to another property, and has charged you because you’ve had to take out a mortgage with a different lender
you were charged after your house was repossessed”
FAQs about the early repayment charge
Below are some of the frequently asked questions about the early repayment charge.
Can I avoid an early repayment charge?
You can avoid paying an early repayment charge by switching your mortgage once your fixed rate period or the period in which you are being charged an early repayment charge has ended.
You can consult with your conveyancer in order to ensure you get this right as if you switch your mortgage before your early repayment charge period has ended then you will be liable for the charge.
Another way to avoid paying an early repayment charge will be to simply avoid taking on credit products which have an early repayment charge
Do I have to pay an early repayment charge?
To find out if you have to pay an early repayment charge you should check with your lender or check your key facts illustration document.
Do all mortgages have early repayment fees?
Not all mortgages have early repayment fees but most will. Early repayment fees will usually be charged on mortgage products where you get a fixed rate or much lower rate than standard for a fixed timeframe.
Why do banks charge early repayment charges?
Banks charge early repayment charges in order for them to recoup any mortgage interest they would have earned from you if you had not overpaid your mortgage.
How is an early repayment charge calculated?
An early repayment charge is usually calculated based on a percentage of your outstanding mortgage balance.
This means the longer you have had the mortgage, the more likely your early repayment charge will be much lower.
In this brief guide we discussed what an early repayment charge is and how you can avoid an early repayment charge on your mortgage or a similar credit product.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.