If you’ve decided to pay off your mortgage early or remortgage before the end of your fixed-rate period, you may have been asked to pay an Early Repayment Charge (ERC). This may have been a bit of a shock, but you’re not alone. Most mortgage contracts enforce some kind of ERC if the borrower decides to pay off the mortgage before the agreed introductory period is completed. And depending on how large your remaining balance is and how long you have left on your initial period, the ERC could be a considerable sum of money. So is it worth paying an ERC? In this guide, we’ll explain what an ERC is, how they are calculated, how you may be able to avoid paying one, and whether it’s worth paying an ERC in certain situations.
What is an Early Repayment Charge (ERC) on a Mortgage?
An early repayment charge (ERC) is a fee that your lender might charge you if you remortgage or pay off your mortgage early, before the end of your introductory or fixed-rate period. Typically this is 2, 3, 5, or 10 years. The fee compensates the lender for the lost interest they would have earned had you kept the mortgage for the full introductory period as originally agreed. ERCs can be calculated in different ways, so it’s important to check your contract or speak to your broker to find out how much you’ll have to pay. We’ll have a look at the most common ways ERCs are calculated a bit later.
Why Do I Have to Pay an Early Repayment Charge (ERC)?
First of all, you don’t have to pay an Early Repayment Charge if you see your introductory or fixed-rate period through to the agreed term, whether that’s 2, 3, 5, or 10 years. There are other scenarios where you might not need to pay an ERC, as we explain in the section below titled ‘Can I Get Out of Paying an Early Repayment Charge?’.
But assuming your circumstances are such that you do have to pay an ERC, let’s briefly explain why. Although it may seem like a lot of money just for switching or paying off your mortgage, it is usually less than your lender would have got from you if you had completed your contracted introductory period. Lenders rely on the interest payments from your mortgage to make money, and these interest payments are effectively a condition of lending to you in the first place. If you pay off your mortgage early, however, the lender will lose out on the remaining income they were expecting to get from you. An ERC is simply a way for them to recoup some of that lost revenue.
How Much is an Early Repayment Charge (ERC) on a Mortgage?
The amount of an ERC can vary depending on several factors, including:
- The remaining balance on your mortgage
- The remaining term of your introductory period
- The type of mortgage you have
- The lender’s ERC policy
Typically, ERCs are a percentage of the outstanding balance on your mortgage, ranging from 1% to 5%. This is often worked out on a sliding scale, where the closer you are to the end of your introductory period, the less you have to pay. For example, on a 5-year fixed-rate period, you may have to pay 5% in the first year, 4% in the second year, 3% in the third, 2% in the fourth, and 1% in the fifth. This is because if you were to leave in the first year, your lender would miss out on more interest than if you were to leave in the final year, so they decide to charge more for an earlier exit. However, some lenders may charge a fixed percentage, such as 3%, no matter how many years into your introductory period you are.
When Do I Have to Pay an Early Repayment Charge (ERC)?
You’ll typically have to pay an ERC if you decide to pay off some or all of your mortgage before the end of your introductory period. You may have to pay an ERC if you:
- Remortgage to a different lender before the end of your introductory period.
- Sell your property and pay off your mortgage before the end of your introductory period.
- Move to a new property before the end of your introductory period and are unable to port your mortgage.
Make a lump sum payment (or a series of payments) that exceeds your annual overpayment allowance. If your mortgage has an overpayment allowance, it is likely to be up to 10% of your remaining balance in a single year, but some lenders allow up to 20%.
Can I Get Out of Paying an Early Repayment Charge (ERC)?
If you want to pay off your mortgage early and you’ve agreed to your lender’s ERC policy, you may not be able to get out of paying it as such. However, there are ways to reduce or avoid paying an ERC in certain circumstances. Let’s have a look at some ways you may be able to do this.
- Choose a mortgage with no ERC. Some lenders offer mortgages with no ERCs, but these may have higher interest rates. These products could be suitable for you if you think you may need to pay off your mortgage early, but we recommend speaking to a mortgage broker to discuss this.
- Negotiate with your lender. You may be able to negotiate a lower ERC with your lender, especially if you are a loyal customer or if you are close to the end of your mortgage term. However, they are under no obligation to deviate from the initial terms of your contract.
- Wait until the end of your introductory period. Most ERCs expire after a certain period of time, typically 2-5 years. If you can wait until your ERC expires before paying off your mortgage or switching to a new lender, you can avoid paying the fee altogether.
- Port your mortgage. If you are looking to move house during your introductory period, you may be able to move your current mortgage to your new property, known as porting your mortgage. Providing you port your entire mortgage, you won’t have to pay an ERC as you won’t be paying off any part of the mortgage early. You can find out more about porting your mortgage by reading our guide, ‘Should I Move My Current Mortgage to a New Home?’
- Stay within your overpayment allowance. If you are simply looking to reduce your remaining mortgage balance, you can avoid paying an ERC by staying within your lender’s overpayment allowance each year.
Is it Worth Paying the Early Repayment Charge (ERC)?
Whether it’s worth paying an ERC to switch mortgages or pay off your mortgage early depends on several factors. We recommend speaking to one of our friendly advisors to discuss your plans and to figure out the right solution. Firstly, we’ll work out how much you’ll be charged on your ERC. Secondly, we’ll run some calculations to see how much you could save by remortgaging or paying off some (or all) of your mortgage early. Thirdly, we’ll look at your general plans and financial goals for the near to medium-term future. Once we have this information, we’ll work out whether paying an ERC is the right option for you, or whether there are other ways to achieve your goals without having to pay an ERC.
The Bottom Line
An Early Repayment Charge is a fee that most mortgage lenders apply when the borrower decides to remortgage or pay off their mortgage before the end of their introductory period. ERCs are usually a percentage of your remaining balance, but lenders calculate the charge in different ways. Depending on these factors, your ERC may be larger than you expected, and you may be wondering if it’s worth paying it to realise your goals. There are certain scenarios where it may be worth paying the ERC, but in some circumstances, it may be preferable to look at other options. We can only answer this question for you once we’ve discussed your situation and done some calculations. If you would like one of our friendly advisors to help you decide whether you should pay an ERC, please book an appointment today and we’ll happily help you.
At Michael Usher Mortgage Services, we’ve been helping our local community for over 30 years! We’re not affiliated with any particular lender, so we can access a comprehensive range of mortgages from across the market to find a deal that suits your needs. We’ll guide you through the process and liaise with your lender, estate agent and solicitor to ensure your application goes as smoothly as possible, and we can also help to protect your mortgage with our FREE Insurance Service.
Talk to one of our friendly mortgage advisors for free to get going quickly. Our head office is on Frimley High Street, but we can also help you remotely via phone or video call if you’d prefer. We look forward to chatting with you!
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