A mortgage early repayment charge (ERC) is a fee you pay your lender if you:
- leave your mortgage before your initial period ends (even if you stay with the same lender)
- overpay more than the amount you agreed with your lender
It’s usually a percentage of the mortgage you have left to pay and could be up to 5% of the mortgage you have left to pay.
Example: Let’s say you had a £250,000 mortgage left and you wanted to leave your fixed term early. To do that, if you has a 5% ERC, you might have to pay up to £12,500.
Not all mortgage deals come with ERCs, so if you don’t have one there’s no fee to worry about!
Why do lenders charge an early repayment charge?
It’s all about the interest. If you leave a fixed period deal early or pay more towards your mortgage than you agreed, your lender loses out on the interest payments they were expecting from you.
That’s why they ask you to pay an early repayment charge – to recover the amount you would have paid them in interest.
Is it ever worth paying an early repayment charge?
That depends if you’d save more than your ERC would cost you to repay.
Here’s an example:
Let’s say you have a £100,000 mortgage. You’re halfway through a 5 year fixed rate deal, paying 3% interest.
Then you see a new 5 year deal, where you could pay just 2% interest instead.
Your ERC is 2% – which means you’d need to pay £2,000 to leave your current deal.
But the new payments could save you £50 a month. Over 5 years that’s £3,000, so a saving of £1,000 overall.
It’s always worth checking with your mortgage adviser, who can look into all the costs of switching for you, and advise you whether it’s worth switching.