Early repayment charges can be a costly surprise if you leave your mortgage deal before it ends, so understanding them is essential before you remortgage or overpay. This guide explains early repayment charges: what they are, how they are calculated, when they apply, and how to avoid or minimise them.
What an early repayment charge is
An early repayment charge, or ERC, is a fee your lender charges if you repay all or part of your mortgage before the end of your current deal, such as during a fixed-rate period. It compensates the lender for the interest they expected to receive. ERCs are common on fixed and discounted deals, and they can be significant, so it is important to know whether your mortgage has one before you act.
How they are calculated
Early repayment charges are usually calculated as a percentage of the amount you repay or your outstanding balance, commonly between 1% and 5%. On a £200,000 mortgage, a 2% charge would be £4,000. The percentage often reduces as you approach the end of your deal, for example stepping down each year of a five-year fix. Your mortgage paperwork sets out the exact charges that apply to your deal.
When they apply
Early repayment charges typically apply during the initial deal period, such as the years of a fixed rate, and usually fall away once that period ends. So repaying or remortgaging during your fixed period may trigger a charge, while doing so after it ends usually does not. This is why many people time their remortgage to complete as their deal ends, when the charge no longer applies, as our guide to the best time to remortgage explains.
Overpayments and the annual allowance
Many mortgages let you overpay a certain amount each year without triggering an early repayment charge, commonly up to 10% of your balance annually. Overpaying within this allowance lets you reduce your mortgage faster without penalty, while exceeding it can incur a charge. If you plan to overpay, check your deal's allowance, as our guide to remortgaging versus overpaying explains, so you make the most of it without unexpected fees.
Longer fixes, larger charges
Early repayment charges tend to be larger and last longer on longer fixed deals. A five-year fix usually carries ERCs for the full five years, often higher in the early years, while a two-year fix has them for a shorter time. This is worth bearing in mind when choosing a deal, since a longer fix locks in your rate but also locks in a longer period during which leaving early would be costly.
When it is worth paying the charge
Occasionally it is worth paying an early repayment charge to switch, if rates have fallen enough that the savings from a new deal outweigh the charge. This requires careful calculation, comparing the cost of the charge against the saving over the new deal, as our guide to the cost of remortgaging explains. An adviser can help work out whether paying the charge makes financial sense in your case.
How to avoid or minimise them
To avoid early repayment charges, time your remortgage to complete as your current deal ends, stay within your annual overpayment allowance, and check your mortgage terms before making large repayments. If you might need flexibility, choosing a deal with lower or shorter ERCs, or a tracker without them, can help. Knowing your charges in advance lets you plan around them rather than being caught out.
An example of an early repayment charge
To see how it works, imagine a £200,000 mortgage with a 2% early repayment charge. Repaying or remortgaging early would cost £4,000 in the charge alone. On a five-year fix, the percentage often steps down each year, so the charge might be larger in year one and smaller by year four. Knowing the exact figure for your deal lets you judge whether leaving early makes financial sense.
Where to find your charge
The early repayment charges that apply to your mortgage are set out in your mortgage paperwork, such as your offer document or annual statement, and your lender can confirm them. Checking these before you remortgage or make a large overpayment means you know exactly what leaving early would cost. It is always worth confirming your specific charges rather than assuming, as they vary between deals and lenders.
Early repayment charges and porting
If you move home and port your mortgage, taking your existing deal to the new property, you can often avoid the early repayment charge, since you are keeping the mortgage rather than repaying it. Porting rules vary by lender, and your circumstances and the new property must meet their criteria. Knowing whether your deal is portable can be valuable if you might move during a fixed period.
Trackers and deals without charges
Not all mortgages have early repayment charges. Some tracker and variable deals let you overpay or leave without penalty, offering flexibility at the cost of a rate that can change. If you value the freedom to repay or switch at any time, a deal without early repayment charges may suit you, though you give up the rate certainty of a fixed deal, as our guide to remortgaging explained touches on.
Planning around your charge
The practical approach is to plan around your early repayment charge: time your remortgage to complete as your deal ends and the charge falls away, stay within your annual overpayment allowance, and only pay a charge to switch early if the savings clearly justify it. Knowing your charge in advance lets you make these decisions deliberately, rather than being caught out by an unexpected fee when you act.
An example of the charge stepping down
On a five-year fix, the early repayment charge often reduces each year, for example starting higher and falling as the deal nears its end. This means leaving in the first year is usually the most expensive, while leaving near the end costs less. Knowing how your charge steps down over time helps you judge when, if ever, it might be worth switching before your deal formally ends.
The charge is not always a barrier
While an early repayment charge can be significant, it should not be viewed in isolation. If rates have fallen enough, the savings from a new deal can outweigh the charge, sometimes within a year or two, as our guide to the cost of remortgaging explains. The right approach is to compare the charge against the saving, rather than assuming it always makes switching not worthwhile.
Understood in advance, an early repayment charge is simply a figure to plan around rather than a nasty surprise, and knowing exactly what yours is, and when it falls away, puts you in control of when to switch.
In short
An early repayment charge is a fee for repaying your mortgage before your current deal ends, usually 1% to 5% of the balance, often reducing as the deal nears its end. They mainly apply during fixed or discounted periods and fall away afterwards. Many mortgages allow penalty-free overpayments up to 10% a year. Time your remortgage to avoid charges, and only pay one if the savings clearly outweigh it.
Where to get help and next steps
Read our guides to timing your remortgage, how much remortgaging costs, and how remortgaging works. This is general information, not mortgage or financial advice.