What Is the Early Repayment Charge on a Mortgage?
An Early Repayment Charge (ERC) is a fee your mortgage lender might charge if you pay off all or part of your mortgage early. This usually happens when you are still in a fixed or special deal period.
The charge is there to compensate the lender for the interest they lose when the loan is repaid sooner than expected; it's normally a percentage of the amount you are repaying early, and it can be significant. Most lenders let you overpay up to 10% of your outstanding balance each year without an ERC.
What is a Mortgage Early Repayment Charge?
An Early Repayment Charge (ERC) is a fee your mortgage lender charges if you pay off more of your mortgage than your allowed limit, or leave your deal, before your fixed or tracker period ends.
It's usually a percentage of the overpayment, and this percentage often decreases over time. For example, on a five-year fixed-rate deal, the charge might be 5% in the first year, dropping to 1% by the fifth year.
The fee compensates lenders against lost interest income, and is regulated by the Financial Conduct Authority
When do you have to pay an ERC
- Paying off your loan early: This could be by repaying your mortgage in full with a lump sum, such as from savings or an inheritance.
- Remortgaging early: This is when you switch to a new mortgage deal with a different lender before your current one ends.
- Overpaying: Most mortgages let you overpay by a certain amount each year without a penalty, usually up to 10% of the remaining balance. If you exceed this limit, you will likely be charged an ERC on the excess.
How to calculate a Mortgage Early Repayment Charge
ERC fees vary by mortgage product and are typically either fixed or tiered.
How much is the mortgage early repayment charge
A fixed fee is a set percentage that applies for the entire special deal period. For example, a lender might charge 2% of the outstanding balance for the full three-year fixed term.
A tiered fee changes over time. The charge is usually higher at the start of the deal and decreases each year. For example, a five-year fixed mortgage might have the following charges:
- Year 1: 5% of the amount repaid.
- Year 2: 4% of the amount repaid.
- Year 3: 3% of the amount repaid.
- Year 4: 2% of the amount repaid.
- Year 5: 1% of the amount repaid.
The formula
(Amount Repaid - Allowed Overpayment) x % Charge (adjusted for the year, if tiered).
Remortgage Example: If your outstanding mortgage balance is £200,000 and you decide to remortgage in year one of a five-year tiered deal, your ERC would be 5% of £200,000, less the 10% overpayment allowance. £200,000 - 10% is £180,000. The 5% fee on £180,000 is £9,000.
Overpayment Example: If your outstanding mortgage balance is £200,000 and you decide to pay off a chunk of £50,000 with a lump sum, such as an inheritance, in the second year of the mortgage, and your mortgage allows a 10% overpayment: 10% of £200,000 is £20,000 with no charge.
The remaining £30,000 overpayment would incur a fee of 4% = £1,200.
Am I better off paying the charges or waiting?
Overpaying a chunk off of your mortgage can save you a lot of interest over the course of a long mortgage term. Switching to a more favourable deal can reduce your monthly payments. But you must compare your savings with the cost of any early repayment charges.
Consider waiting until your fixed rate is due to expire before remortgaging. If you're overpaying, consider spreading the payments out over multiple 12-month periods to make the most of any annual 10% fee-free allowance.
Use our Mortgage Repayment Calculator to calculate the overall cost of different rates over the current or lower total mortgage debt.
Expert Tip For Landlords - Is the Early Repayment Charge tax-deductible from rental income?
If you own the property as a private individual, you can't deduct the ERC, but it will be included in your 20% tax credit under Finance (No. 2) Act 2015, Section 24.
If you own the property through a Limited Company, you can deduct the full cost of the ERC as a 'Residential Property Finance Cost' from your rental turnover before calculating Corporation Tax at 19-25%.
Are you selling or remortgaging as a limited company?
If you're remortgaging, you can usually classify the ERC as a revenue expense to deduct it from your income. If you're selling, it may have to be offset against capital gains tax rather than income tax. Speak with a specialist tax advisor to find out your personal tax liability.
Andrew Boast FMAAT
CEO of SAM Conveyancing
Lender-specific examples of Early Repayment Charges
The following examples are based on common products from these lenders. Always review your mortgage offer to confirm the exact terms that apply to your deal.
Lender | Typical ERC Structure |
|---|---|
Lender Lloyds Bank | Typical ERC Structure Lloyds Bank uses a tiered structure on its fixed-rate products, similar to other major lenders. The ERC is a percentage of the outstanding loan balance and decreases annually. |
Lender Nationwide | Typical ERC Structure Nationwide commonly uses a tiered structure on its fixed-rate mortgages. The charge is highest in the first year and reduces annually until the fixed period ends. |
Lender NatWest | Typical ERC Structure NatWest generally applies a tiered ERC on its fixed-rate mortgages, where the charge is highest in the first year and reduces over time. They also have a 10% overpayment allowance, but some products may allow a higher limit. |
Lender Santander | Typical ERC Structure Santander commonly uses a tiered charge structure on its fixed-rate deals. The lender also has specific policies that may waive the ERC for existing customers moving home. |
Lender Barclays | Typical ERC Structure Barclays has been known to offer fixed-rate products with a flat ERC that remains the same for the entire fixed term. For example, a 5% charge that applies for the full ten years of the deal. |
Lender HSBC | Typical ERC Structure HSBC often uses a tiered approach for its fixed-rate deals. The charge is a percentage of the original loan amount, which reduces annually for each remaining year of the period. |
Can you remortgage early?
Yes, you can remortgage before the end of a fixed term, but you'll trigger an early repayment charge. It is almost always better to wait until your current deal is coming to an end.
To avoid an ERC, you should start the remortgage process around three to six months before your current deal ends. This gives you time to secure a new offer and switch lenders smoothly, so you don't get stuck on an expensive standard variable rate.
For the full early remortgage process read our guide on How to remortgage early.
Mortgages without Early Repayment Charges
You can get a mortgage with no early repayment charge. These are also known as no early repayment charge mortgages or mortgages with no early redemption charges.
These are usually a standard variable rate (SVR) or a discounted variable rate mortgage. Because the interest rate can change at any time, lenders don't lock you into a long-term deal, so there is no penalty for leaving early. These can be useful if you plan to sell or remortgage soon, but rates are often higher than those on fixed-rate deals.
Book a FREE(i) consultation with our independent mortgage broker.
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Frequently Asked Questions About Early Repayment Charges
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Caragh has written extensively for SAM with expertise on sale and purchase conveyancing, the Help to Buy redemption process, equity transfers and deeds, leasehold reform, RICS home surveys, shared ownership, and independent legal advice for specialist mortgage products and ownership structures.
