If you want to change or end your mortgage deal early, for whatever reason, you will probably have to pay early repayment charges (ERC) which could add up to thousands of pounds. So why are there ERC and how can you avoid them. Here’s more information about these charges everyone should be aware of when taking out a mortgage.
Why are there early repayment charges?
When your lender sets up a mortgage for you, they have costs in borrowing the money that they then lend on to you. To recoup those initial costs as well as make some profit, they expect you to keep your mortgage for a certain amount of time. However, if you end the mortgage early, they won’t get that expected money back. So the ERC are there to deter you from leaving the mortgage early as well as acting as compensation for the money they would lose.
When might ERC be levied?
The main reasons why you might end up with ERC are:
- You want to end the mortgage deal early – If you want to switch your mortgage product or remortgage with the same lender, you could be charged ERC.
- If you want to make a big repayment – Most lenders let you pay off your mortgage capital at a certain rate. You could face ERC If you exceed that rate by making a significant repayment.
- You’re moving home and changing to a different lender – Taking a new mortgage out with a different lender because you’re moving home (when you have a fixed or discounted mortgage deal).
How to avoid early repayment charges
You can avoid ERC by doing the following:
- Never exceed your payment limit – You’re usually limited to paying no more than 10% of your mortgage annually, including when you’re on a discount or fixed-rate mortgage.
- Port your mortgage – Taking out a new mortgage with the same lender at the same interest rate is called ‘porting’ your mortgage. You don’t pay the ERC because you’re taking your ERC with you to the new mortgage deal.
- Opt for a ‘No ERC’ deal – Get a ‘no ERC’ mortgage deal offered by a lender which allows you to pay off your loan as you wish with no repayment charge.
- Wait till the end date of your ERC – There is an end date for all ERC. This is generally the time your fixed rate ends or a specific time from the date your mortgage is completed. End your mortgage after this date and you won’t pay ERC.