Early Repayment Charges Explained

What Is an Early Repayment Charge?

An early repayment charge is a penalty fee that mortgage lenders apply when you repay all or a significant part of your mortgage during an initial deal period. This could be triggered by remortgaging, selling your home, or making large overpayments beyond your allowance.

Lenders charge ERCs because they lose out on the interest income they expected to earn over the full deal period. When you signed up for a fixed or tracker rate, the lender priced that deal on the assumption you'd stay for the entire term. Leaving early disrupts that arrangement.

ERCs are set out in your mortgage offer document and are usually expressed as a percentage of the outstanding balance. They're one of the most important factors to consider before making any changes to your mortgage.

How Are Early Repayment Charges Calculated?

ERCs are typically calculated as a percentage of the remaining mortgage balance at the time you repay. The percentage usually decreases over the deal period. For example, a five-year fixed rate might have an ERC of 5% in year one, 4% in year two, 3% in year three, and so on.

On a £250,000 mortgage, a 3% ERC would cost £7,500. On a £150,000 mortgage, the same percentage would be £4,500. These are significant sums that can easily outweigh the savings from a better interest rate.

Some lenders use slightly different structures. A few charge a flat number of months' interest rather than a percentage of the balance. Your mortgage offer will spell out exactly how your ERC is calculated, so it's worth checking this document carefully before making any decisions.

When Do Early Repayment Charges Apply?

ERCs apply during the initial deal period of your mortgage, which is the time you've agreed to a specific rate. For a two-year fixed rate, ERCs apply for two years. For a five-year fix, they apply for five years. Once this period ends, you can usually switch or repay without any penalty.

ERCs can be triggered by several actions: remortgaging to a different lender, repaying the mortgage in full (for example, when selling your home), or making overpayments that exceed your annual allowance. Most mortgages allow overpayments of up to 10% of the balance per year without incurring an ERC.

It's important to note that ERCs do not apply to regular monthly payments. They only kick in when you repay more than the agreed schedule allows during the deal period.

Are Early Repayment Charges Tax Deductible?

For residential homeowners, early repayment charges are not tax deductible. They are simply a cost of exiting your mortgage deal early and cannot be offset against any tax liability.

For buy-to-let landlords, the situation is different. ERCs incurred on a buy-to-let mortgage may be allowable as a revenue expense if you're remortgaging the same property. However, tax rules are complex and change frequently, so it's advisable to speak to an accountant or tax adviser for guidance specific to your circumstances.