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A Guide To Early Repayment Charges And How To Avoid Them

MORTGAGES | 26.04.2022

Switching mortgage deals can seem like a good idea if you can get a lower interest rate – but there could be a catch. Many lenders will charge you extra fees if you want to break your mortgage deal early i.e before the term ends. This is what is known as an early repayment charge (ERC). We are here to explain what ERCs are, how they work, and how you can avoid them.

What is an early repayment charge? (ERC) 

An early repayment charge is a penalty that your provider may charge if you want to change, or end your current mortgage too early. You can face an ERC if you have overpaid on your mortgage by more than the provider allows, or if you pay off the entire loan too early. A mortgage deal or mortgage product is not the entire term of the mortgage, but the length of time you pay an initial rate of interest, before moving onto your lender's standard variable rate. The tie-in period of your mortgage deal is the length of time that an early repayment charge will apply. 

How much is an early repayment charge?

ERCs vary from deal to deal but are typically between 1% - 5% of the mortgage. These rates can sometimes reduce over time, but this is up to the lender.  

When will I have to pay an ERC?

If your mortgage deal has a charge for early repayment, it will usually occur during the tie-in period under the following conditions: 
  • Switching to a new deal with a different rate 
  • Paying off your mortgage or making an overpayment above the lender’s allowance. 
  • You sell the property and the mortgage can not be ported onto the next property.
If your mortgage deal comes with an early repayment charge, this will be outlined to you, along with the potential cost in your mortgage agreement.  However, not all mortgage deals come with an early repayment charge. Many standard variable rate mortgages don't, meaning you can change lenders whenever needed without paying a penalty fee - but higher rates of interest will usually be charged with this type of deal. 

Ways to avoid ERCs 

  • Choose a deal with no ERC - some lenders will offer flexible offers that allow you to overpay without limitation. Though, be sure to consider the interest rate and any arrangement fees in your calculations.
  • Know how much you can overpay each year without a penalty, and don't go over this limit. 
  • Port your mortgage when you move - some lenders may let you transfer your current mortgage deal to another property without paying a charge. However, be aware that this is not guaranteed and can vary depending on the type of mortgage you have. 
If you are still unsure about ERCs and if they will affect you in your mortgage deal, give us a call and speak to one of our advisers who will be happy to provide the information you need and advise you on your options.
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