Early repayment charges: how to avoid ERCs on your mortgage

An early repayment charge is a fee your lender applies if you repay some or all of your mortgage before the end of a fixed or discounted deal period. It is normally a percentage of the amount you repay, often stepping down each year of the deal, so a five year fix might charge 5% in year one falling to 1% in year five. You can usually avoid it by staying until the deal ends, keeping overpayments within your annual allowance, porting the mortgage when you move, or choosing a product with no ERC.

The ERC is a percentage of the balance being repaid, not of the original loan. On a 200,000 pound balance with a 3% charge, redeeming in full costs 6,000 pounds. Repay a 20,000 pound lump sum outside your allowance and the charge is 600 pounds on that amount, not 6,000.

That distinction matters. People sometimes assume any overpayment triggers a charge on the whole mortgage. It does not. The charge applies only to the excess above your allowance.

Your exact percentages are set out in your mortgage offer and in the ESIS illustration the lender must give you, which shows the charge in both percentage and pound terms for each year. If you cannot find it, ask the lender for a redemption statement, which will give you a precise figure to a specific date.

Tapering

Most ERCs step down over the deal. A typical five year structure might run 5%, 4%, 3%, 2%, 1%, and a two year deal might run 2% then 1%. Some lenders use a flat percentage for the whole period instead, and some structure it by deal year while others go by calendar date, which can shift the step point by weeks.

The steps create cliff edges worth planning around. On a 250,000 pound balance, moving from a 3% year to a 2% year saves 2,500 pounds. If you are six weeks away from that date, waiting is usually the obvious move.

Be careful about which date the taper follows. Some lenders step down on the anniversary of completion, others on a fixed date such as the end of a month, and others on the anniversary of the product start date, which may not be the same thing. Get it in writing.

The common triggers are:

• Redeeming the mortgage in full, usually because you are remortgaging to another lender.
• Selling the property without porting the mortgage to a new one.
• Overpaying more than your annual allowance.
• Switching to a different product with the same lender before the deal ends, though many lenders waive the ERC on an internal product transfer taken at the right point, so ask.

Things that generally do not trigger a charge include making overpayments within your allowance, coming to the natural end of the deal, and moving onto the lender's standard variable rate afterwards.

Most lenders allow you to overpay up to 10% of the balance each year without an ERC. That is the common figure, not a legal requirement, and it varies. Some lenders allow more, a few allow less, and the detail differs in ways that catch people out.

Ask your lender three specific questions. Is the 10% measured against the balance at the start of the calendar year, on the anniversary of the mortgage, or something else. Does the allowance carry over if you do not use it, which it usually does not. And does the allowance include the capital element of your normal monthly payments, which for most lenders it does not, though for some it does.

If you plan to overpay steadily, knowing the answers is the difference between a free reduction and an avoidable charge. There is more on whether overpaying is the right use of your money in our separate article on overpayments.

Mortgage offers from a new lender are typically valid for a period of months, commonly three to six. That means you can usually apply while still inside your deal and arrange completion for the day after the ERC period ends.

A sensible sequence is to start looking three to six months before the end date, get the exact ERC expiry date from your current lender in writing, and instruct the new lender to complete on or immediately after that date. Do not aim for the same day without checking, because interest is charged daily and lenders differ on whether the final day of the deal still carries the charge.

Get this wrong by a week and you can pay thousands for nothing. Get it right and you go straight from your old deal to the new one with no time on the standard variable rate.

Sometimes the maths says pay the charge and move anyway. This happens when the rate difference is large and you have a long time left on the deal.

Here is a worked example, with all rates given as illustrative assumptions rather than current market rates.

You owe 200,000 pounds with 20 years remaining. You are two years into a five year fix at an assumed 6.2%, so three years remain and your ERC is 3%, which is 6,000 pounds. A new five year deal is available at an assumed 4.6%.

Your current monthly payment is roughly 1,455 pounds. At 4.6% it would be about 1,273 pounds. That is 182 pounds a month, or 2,184 pounds a year.

Over the three years you would otherwise remain on the old deal, the saving is around 6,552 pounds. Against a 6,000 pound charge, that is roughly 550 pounds ahead, before you count the new lender's fees, valuation and legal costs. Add a 999 pound product fee and you are behind.

So in that version, switching is marginal and probably not worth it. Change one variable and the answer flips. If four years remained on the old deal, the saving would be around 8,700 pounds against the same charge, which is clearly worth doing. If the ERC had already tapered to 1%, or 2,000 pounds, switching would be worth it even over three years.

The rule is simple. Work out the total saving over the remaining deal period, subtract the ERC and every fee, and only move if the number is comfortably positive. Comfortably matters, because you are giving up certainty for a modelled outcome.

Two other cases justify paying an ERC: when you are selling and cannot port, and moving is worth more to you than the charge, and when you need to release equity or restructure and the current lender cannot help.

Some tracker and variable products carry no early repayment charge at all, and lifetime trackers often fall into this group. They are worth considering if you expect to repay a lump sum, expect to sell within a year or two, or are waiting for a specific event such as a divorce settlement or a probate sale. You usually pay for that freedom in the rate, so treat it as buying an option rather than getting something for nothing.

If you are weighing a charge against a switch, an FCA-authorised broker from the MortgageMatch directory can price the whole move, fees included, before you commit.