What are Early Repayment Charges (ERCs) on Mortgages?
An early repayment charge can be applied if you want to repay your mortgage entirely or make additional repayments (above your agreed monthly repayments) to your mortgage. They allow lenders to deter the customers from switching mortgage providers during the initial product term.
Early repayment charges generally apply to mortgages with a fixed rate or tie-in period, which can be two, five or ten years, for example. (This is not to be confused with the overall term of the mortgage, which could be 25 years.)
Each lender sets their own ERC, and the charge can also vary between mortgage products. If your mortgage has an early repayment charge, it will be outlined in the mortgage illustration.
The ERC charge is normally set as a percentage, usually between 1%-5%. It's not uncommon to find that the charge decreases over the fixed term period while other ERCs may remain at a flat rate for the entire fixed period.
Can I get a mortgage with no ERC?
Most mortgages come with early repayment charges, as they help to guarantee a profit for lenders.
Typically, the most common mortgage with no early repayment charges is a tracker or standard variable rate (SVR) mortgage, but these can be more expensive and are typically what the fix rate mortgages move onto once the initial deal has finished. Lenders offer fixed-rate mortgages without ERC, but they are few and far between, and they can be more difficult to access.
Advantages of getting a mortgage without early repayment charges
Saving you money in the long run
During a mortgage product term, you may get a promotion at work, a bonus or find yourself with a lump sum of money that you would like to pay into your mortgage.
It's important to note that mortgages with ERC can also have an overpayment facility, which is usually around 10% of the outstanding capital per year. If you have an overpayment facility, you may find this adequate for any overpayments you wish to make; otherwise, you may need a mortgage without an ERC.
Flexibility
If you don't have a set income (perhaps self-employed or commission only), being able to pay off larger amounts of your mortgage at higher-earning points could be quite helpful. Having the flexibility to control your monthly cash flow is undoubtedly appealing, so having a mortgage with early repayment charges may not suit your wants or needs.
Suppose you hope to move house or sell the property during the initial tie-in period and don't want to port your mortgage (transfer it to another property). In this case, it may be more sensible to choose a mortgage without early repayment charges.
Drawbacks to getting a mortgage without early repayment charges
Tracker (variable) rate mortgages are readily available from lenders. They are often slightly more expensive, and they also do not guarantee a fixed repayment amount during the life of the product. As the product is linked to a base rate (such as Bank of England Base Rate or the lender’s Standard Variable Rate), any increase to these rates will mean that your mortgage rate will go up, costing you more each month.
Some lenders occasionally offer fixed rate mortgages without early repayment charges, but these are often more expensive than their counterparts. These are much harder to source, so you will need to speak to an experienced, whole of market mortgage broker to help find the best rate.
Furthermore, some lenders will place additional charges in substitute for early repayment charges. Lenders may choose to charge you these fees upfront or within the loan. The risk of paying these fees is you may feel overcharged if you don’t need to pay more than your fixed monthly amount.
How are Early Repayment Charges calculated?
ERCs are calculated as a percentage of the outstanding mortgage balance. The ERC specific to your mortgage will be shown in the mortgage illustration, either as flat percentage for the fixed-rate term, or the percentage may decrease over this period.
For example, if you had a two-year fixed mortgage, you could incur a 3% charge in year one, whereas it reduces to 1.5% in year two.
Example of the costs of early repayment charges:
Each lender and mortgage product will vary on prices for early repayment charges. Examples of ERC rates:
Fixed ERC rate
A £200,000 loan on a 2 year fixed rate mortgage. The ERC is a 3% charge until the end of the 2nd year of the mortgage.
Decreasing ERC rate
A £200,000 loan on a 5 year fixed rate mortgage.
The ERC is 3.25% of the amount being repaid until the end of year 2, then 2.75% of the amount being repaid until the end of year 3, then 1.75% of the amount being repaid until the end of year 4, then 0.75% of the amount being repaid until the end of year 5.
As each mortgage and lender can have different ERC’s and lending criteria, it is always important to look for this information before signing up for a deal.
To find out more about early repayment charges, speak to one of our expert mortgage brokers today. We will talk you through your current mortgage deal and look to see what else you could be eligible for on the market.
19th January 2022
