An early repayment charge (ERC) is a penalty fee that lenders impose if you overpay beyond your allowed limit or repay your mortgage in full during an incentive period, such as a fixed or discounted rate deal. The charge compensates the lender for the interest income they lose when you pay off the loan ahead of schedule.
ERCs are typically expressed as a percentage of the outstanding mortgage balance, usually between 1% and 5%. They often decrease over the course of the deal — for example, 5% in year one, 4% in year two, and so on. Most lenders allow you to overpay by up to 10% of the outstanding balance per year without triggering the charge.
ERCs are a critical consideration when deciding whether to remortgage, make large overpayments, or sell your property mid-deal. Before making any move, calculate whether the savings from switching to a better rate outweigh the cost of the ERC. Once the incentive period ends and your mortgage moves to the standard variable rate, there is usually no ERC.
You are in year 2 of a 5-year fixed rate mortgage with £250,000 outstanding. The ERC is 3% in year 2. If you want to remortgage now, you would pay an ERC of £7,500 (3% of £250,000). However, the new deal saves you £200/month — over the remaining 3 years, that is £7,200 in savings, which does not quite cover the ERC. It may be better to wait until the fix ends.
Key Points
- Charged when you overpay or repay your mortgage during a deal period
- Typically 1-5% of the outstanding balance, decreasing each year
- Most lenders allow up to 10% annual overpayment without a charge
- No ERC usually applies once you are on the standard variable rate
- Always weigh the ERC cost against potential savings before switching