How To Avoid an Early Repayment Charge
If you leave your mortgage deal early or pay it off ahead of time, your lender may charge you a hefty penalty fee. Here’s when early repayment charges may apply and how you could work around them.
If you’re lucky enough to be able to pay off your mortgage early or have found a better rate to switch to, nice work.
But before you hit the exit button on your current deal, consider if you’ll be liable for an early repayment charge that might cancel out any savings made by switching or overpaying your mortgage.
Of course, sometimes life happens and leaving a mortgage deal is unavoidable, perhaps because you need to move home or have separated from your partner.
Whatever the reason, knowing how early repayment charges work and how much it will cost you to leave your deal is key before making any big decisions.
What is a mortgage early repayment charge?
An early repayment charge on a mortgage is a penalty fee that most borrowers face if they want to change or end their current mortgage deal early.
A mortgage deal, also called a mortgage product, isn’t the entire term of your mortgage. It’s the length of time you pay an initial rate of interest before you’re due to move on to your lender’s standard variable rate. The most common type of mortgage deal has a fixed rate of interest for between two and five years, although some may be up to 10 years or even longer. The tie-in period of your deal is the length of time an early repayment charge will apply.
If your mortgage deal has an early repayment charge attached to it, your lender will outline the potential cost and when it applies in your original mortgage agreement. It should also be shown in your annual mortgage statements.
When does an early repayment charge apply?
If your mortgage deal has a penalty for early repayment, it will usually kick in during the tie-in period if:
- You switch to a new mortgage deal with a different rate.
- You overpay (or pay off) your mortgage above the lender’s overpayment allowance.
- You sell your property and your mortgage can’t be ported to the next property.
Early repayment charges often apply to fixed-rate deals but they can apply to variable rate mortgages, such as capped and discount deals too.
Not all mortgage deals have an early repayment charge, though. Most standard variable rate deals don’t, which means you can move deals or change lenders whenever you like without paying a penalty. You will usually be charged a higher rate of interest for this type of deal, though.
Why are there early repayment charges?
Lenders build in mortgage early repayment charges to put off borrowers ending their agreement earlier than planned. The charge lets lenders recover costs and interest you would have otherwise paid them throughout the deal you’re cutting short.
The goal for the lender is to make profit from the interest you pay on your loan. This helps make sure they don’t end up out of pocket. This may not be much consolation for the borrower, but the interest rate you’re offered at the outset is based on you keeping the deal for a set period of time.
How much is an early repayment charge?
You will usually pay between 1% and 5% of your outstanding mortgage loan as a penalty for exiting early.
Depending on the lender, this may be tiered with a higher percentage earlier on in the deal, reducing as it gets closer to the end. This means that waiting until you move into the next tier would cost you less.
Here’s an example. Say you are in a five-year fixed-rate deal and you want to switch to a lower rate with another lender in year two. If you have £120,000 left to pay on your mortgage and a 3% charge, you would pay £3,600. In year four, if the charge reduces to 1% of the loan, you would pay £1,200. So the longer you sit tight, the lower the early repayment charge.
It’s worth knowing that if you’re just switching to a different rate with your current lender, it may waive any early repayment charge if you are nearing the end of your current deal.
How to avoid early repayment charges
The best way to avoid an early repayment charge is to be clear on the terms of your agreement and to work within them. Here are some possible workarounds:
- Know how much you can overpay each year without a penalty, and don't go over this limit. It’s usually no more than 10% of your mortgage balance each year.
- Consider choosing a deal with no early repayment charge, though make sure you consider the interest rate and any arrangement fees in your calculations.
- Respect the deadline, after which early repayment charges won’t apply. This is often tied in with the end of your deal period, though some tie-in periods can last longer.
- Port your mortgage when you move. Some mortgage lenders let you transfer your current deal to another property without paying an early repayment charge, though this isn’t guaranteed, and varies depending on what type of mortgage you have.
- Choose a shorter initial deal if you’re likely to move or are keen to shop around to get a better rate soon.
When is it worth paying an early repayment charge?
On the face of it, reducing your mortgage debt ahead of time or securing a lower interest rate sounds like a wise move. But you’ll want to make sure that a high early repayment penalty won’t cancel out savings you make in interest. Whether it's a price worth paying will depend on your specific mortgage agreement and circumstances. If it’s an option, waiting until there is no fee, perhaps towards the end of your deal, might be worthwhile.
Early repayment charges can be substantial, so check with your lender if you're in any doubt about how it works for your mortgage.
A mortgage adviser can also help you work out the best route for your circumstances.
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Caroline Ramsey is a content creator who specialises in personal finance. More than a decade of working in editorial teams, she offers highly tailored content covering a number of topics. Read more
Holly champions clear, jargon-free writing. She’s been creating finance content for leading organisations for over 10 years. Read more