Remortgage With Early Repayment Charge

What Is an Early Repayment Charge?

An early repayment charge is a fee that your mortgage lender can charge if you pay off your mortgage, or a significant portion of it, before the agreed deal period ends. ERCs are designed to compensate the lender for the interest income they lose when a borrower exits a deal early.

ERCs are most commonly associated with fixed-rate mortgages, but they can also apply to tracker rate deals, discount rate mortgages, and some variable rate products. The charge is typically expressed as a percentage of the outstanding mortgage balance and is set out in your mortgage terms when you first take out the deal.

For example, if you have a five-year fixed-rate mortgage with a 3% ERC in the first year, 2% in the second year, 2% in the third year, 1% in the fourth year, and 1% in the fifth year, leaving in the first year with an outstanding balance of 200,000 pounds would cost you 6,000 pounds in early repayment charges.

It is crucial to check your mortgage offer or terms and conditions to understand exactly what ERCs apply to your deal. Some lenders use a flat percentage throughout the deal period, while others use a reducing scale where the charge decreases each year. The specific structure of your ERC will directly affect how much it costs you to leave at any given point.

ERCs apply when you remortgage to a new lender, when you repay your mortgage in full, and sometimes when you make overpayments above a certain threshold. Most mortgages allow overpayments of up to 10% of the outstanding balance each year without triggering an ERC, but exceeding this limit could incur a charge on the excess amount.

How Much Are Early Repayment Charges?

The amount you pay in early repayment charges varies depending on your lender, the type of mortgage, and how far into the deal period you are. Understanding the typical range can help you plan ahead and make informed decisions about when to remortgage.

Typical ERC levels in the UK:

• Two-year fixed-rate mortgages - ERCs typically range from 1% to 3% of the outstanding balance, often reducing in the second year
• Five-year fixed-rate mortgages - ERCs often start at 3% to 5% in the first year and reduce by 1% each subsequent year
• Ten-year fixed-rate mortgages - ERCs can be higher in the early years, sometimes starting at 5% to 7%, and typically reduce over time
• Tracker and discount rate mortgages - ERCs vary widely but are generally lower than those on fixed-rate products

To put this into real terms, here are some examples of what ERCs could cost on different mortgage balances:

• A 2% ERC on a 150,000 pound mortgage would cost 3,000 pounds
• A 3% ERC on a 250,000 pound mortgage would cost 7,500 pounds
• A 5% ERC on a 300,000 pound mortgage would cost 15,000 pounds

These are significant sums, which is why it is so important to factor them into any decision about remortgaging early. However, they should be weighed against the potential savings from securing a lower interest rate, which can also be substantial over the remaining term of the mortgage.

Some lenders offer mortgage products with no early repayment charges at all, though these tend to come with slightly higher interest rates. If flexibility is important to you and you think you might want to remortgage before the end of a deal period, it may be worth considering one of these products even if the headline rate is a little higher.

How to Find Out Your Early Repayment Charge

Before making any decisions about remortgaging, you need to know exactly what ERC applies to your current mortgage. There are several ways to find this information.

Check your mortgage offer document. When you took out your current mortgage, you would have received a mortgage offer that sets out all the terms, including any early repayment charges. The ERC section should detail the percentage charged, whether it reduces over time, and when it expires.

Look at your annual mortgage statement. Many lenders include information about applicable ERCs on your annual mortgage statement. This can be a quick way to check without having to dig out your original paperwork.

Log in to your lender's online portal. Most UK mortgage lenders now offer online account management where you can view your mortgage details, including any outstanding early repayment charges. This is often the quickest way to get up-to-date information.

Contact your lender directly. If you cannot find the information elsewhere, call your lender's customer service team and ask them to confirm the ERC that applies to your mortgage, including the exact amount in pounds and the date it expires.

When checking your ERC, make sure you understand the following details:

• The percentage rate and whether it changes over time
• Whether the charge is calculated on the full mortgage balance or just the amount being repaid
• The exact date the ERC period ends
• Whether any overpayment allowance exists and how much it is
• Whether the ERC applies to product transfers with the same lender or only to full redemptions

Armed with this information, you can make a proper comparison between the cost of paying the ERC and the potential savings from a new mortgage deal.

Calculating Whether It Is Worth Paying the ERC

The fundamental question when considering a remortgage with an early repayment charge is whether the money you save on your new deal will exceed the cost of the ERC. This requires a straightforward calculation, though the details matter.

To work this out, you need to compare the total cost of staying on your current deal until the ERC expires against the total cost of switching now and paying the ERC. Here is a step-by-step approach:

Step 1: Calculate the cost of staying on your current deal. Work out how much you will pay in monthly payments from now until your current deal expires, including when you would move onto the standard variable rate if applicable.

Step 2: Calculate the cost of switching now. Work out the cost of the ERC plus any remortgage fees, then add the monthly payments on the new deal over the same time period.

Step 3: Compare the two figures. If the total cost of switching (including the ERC) is lower than the cost of staying, it may make financial sense to remortgage early.

For example, suppose you have 18 months left on a fixed rate at 4.5% with a 1% ERC on a 200,000 pound balance. The ERC would cost 2,000 pounds. If you can remortgage to a rate of 3.5%, your monthly saving would be approximately 100 pounds. Over 18 months, that saving totals 1,800 pounds, which does not quite cover the 2,000 pound ERC. In this case, it would be marginally better to wait.

However, if the rate difference were larger, or the remaining ERC period shorter, the numbers could easily work in favour of switching. A mortgage broker can run these calculations for you and provide a detailed comparison based on your specific circumstances.

It is also important to consider factors beyond the immediate financial calculation, such as the security of locking into a new fixed rate if you believe interest rates are likely to rise, or the benefit of releasing equity for a specific purpose that has its own financial value.

Strategies to Minimise or Avoid Early Repayment Charges

If you want to remortgage but are put off by the prospect of paying an ERC, there are several strategies that can help you minimise or avoid the charge altogether.

Wait for the ERC to expire. The simplest approach is to wait until your deal period ends and the ERC no longer applies. Most lenders allow you to start the remortgage process up to six months before your deal expires, so you can have a new mortgage ready to go without any gap. Many lenders will allow you to lock in a new rate while your current deal is still running.

Use your overpayment allowance. Most mortgages allow you to overpay by up to 10% of the outstanding balance each year without incurring an ERC. By making maximum overpayments before switching, you can reduce the balance on which the ERC is calculated and also reduce the overall cost of the penalty if you do decide to leave early.

Consider a product transfer. Switching to a new deal with your existing lender through a product transfer may not trigger an ERC, depending on your lender's terms. Some lenders allow product transfers without penalty, even if you are still within your deal period. It is worth checking with your current lender before looking elsewhere.

Time your remortgage carefully. If your ERC reduces over time, waiting just a few more months could significantly reduce the charge. For instance, if your ERC drops from 3% to 2% in three months, waiting could save you thousands of pounds on a large mortgage balance.

Factor the ERC into your new deal. Some borrowers choose to add the ERC to their new mortgage balance, spreading the cost over the term of the new loan. While this means you will pay interest on the ERC amount, it avoids the need to find a lump sum upfront. Be aware that this increases your overall borrowing and LTV ratio.

Choose products without ERCs in future. When you next remortgage, consider whether a product without early repayment charges might suit your circumstances, even if the rate is slightly higher. This gives you the flexibility to switch again whenever a better deal becomes available.

When Paying an Early Repayment Charge Makes Sense

While ERCs can represent a significant cost, there are situations where paying one to remortgage early can be the right financial decision. Understanding when this is the case can help you avoid missing out on genuine savings.

Interest rates have fallen significantly. If rates have dropped substantially since you took out your current deal, the monthly savings on a new lower rate could more than offset the ERC over a relatively short period. This is particularly true for larger mortgages where even a small rate reduction translates to significant monthly savings.

You need to release equity urgently. If you need to access the equity in your home for essential purposes such as major home repairs, business investment, or debt consolidation, the cost of the ERC may be justified by the financial benefit of releasing those funds now rather than waiting.

Your financial circumstances have changed. If your income has reduced and you are struggling with your current payments, remortgaging onto a longer term or lower rate could make your mortgage more manageable, even after paying an ERC. Financial hardship is a serious matter and it may be worth discussing your options with your lender or a free debt advice service before making decisions.

You are selling your property. If you are selling your home, you will need to repay your mortgage and the ERC will apply. In this case, the charge is unavoidable, but it should be factored into your overall financial planning for the move. Some lenders offer portable mortgages, which allow you to transfer your deal to a new property without paying the ERC.

The ERC is relatively small. If you are near the end of your deal period and the ERC has reduced to 1% or less, the cost may be modest enough that the benefits of switching early outweigh the penalty. A broker can help you run the numbers to confirm whether this is the case.

In any of these situations, getting professional advice from a qualified mortgage broker is recommended. They can provide a detailed cost comparison and help you understand the full financial implications of your decision.