ERCs are very common, and the circumstances in which you may obtain one will be written into your mortgage terms. Fortunately, ‘no early repayment charge’ mortgages are available, so it’s possible to avoid being hit with these sneaky fees later down the line.
This guide explains why and when some lenders apply ERCs, the different types of no ERC mortgages available and the associated pros and cons. We also cover how to avoid ERCs if you’re looking to remortgage or have a change of circumstances.
What is an early repayment charge? As the name suggests, an early repayment charge is a fee you may incur from your mortgage provider if you pay off your mortgage early, i.e. before the agreed end of your deal. ERCs can also apply if you:
- Overpay by more than your lender allows within a set period.
- Remortgage your home with a new lender during the term of your current mortgage deal.
- Have to terminate the deal and sell your home.
Sometimes referred to as ‘redemption charges’ or ‘redemption fees’, ERCs are typically charged as a percentage of the value of loan you are yet to repay, usually at a rate of between around 1 and 5%.
Depending on the amount borrowed, this could amount to thousands; a borrower who has an outstanding mortgage of £200,000, for example, could face charges of up to £10,000 (based on a 5% ERC) if they wanted to exit or switch plans.
Why do lenders have early repayment charges?Mortgages have a set period of years to pay them off, the duration of which will be agreed with your mortgage provider prior to signing the contracts. Every month for the duration of your mortgage term, you’ll repay the lender an agreed sum, which usually includes a chunk of the capital owed, plus interest.
If you pay off your mortgage early, or overpay by more than the agreed allowance, you may face an ERC to make up for the lost interest your lender would have made throughout the remainder of your mortgage agreement.
While ERCs can act as a deterrent to prevent you from switching every time you find a better deal, most lenders have an annual ‘overpayment allowance’ which enables you to make additional payments within the period without incurring an ERC. This is usually equivalent to around 10% of the outstanding balance of your mortgage.
It’s also useful to know that some mortgage providers’ ERCs reduce over time. For example, the charge could be 5% initially, dropping to 1% after X number of years, and waived altogether later on. As a general rule, the longer you have left on your introductory deal, the higher the ERC.
Can you get a no early repayment charge’ mortgage?A number of mortgage providers offer deals without early repayment charges - although there may be stipulations attached. If you’re looking to take out a mortgage and feel you may be in a position to pay it off early in the future, ask a broker which lenders are best to approach.
What no ERC mortgages are available?ERCs are more common with some types of mortgage products than others. For example, nearly all fixed-rate mortgages will come with them, but it’s quite unusual for them to be associated with standard variable rate (SVR) mortgages
Some of the different types of no ERC mortgage products include:
No ERC tracker mortgagesTracker mortgage without ERCs are fairly common, although this usually only applies once you’ve been moved onto the lender’s standard variable rate (SVR)
Since the SVR is likely to be higher, this is the time most borrowers look to remortgage to another deal. You’ll need to check the terms of your agreement, but this is usually a good time to get out while avoiding the sting of an ERC.
No ERC interest-only mortgagesInterest-only (IO) mortgages with no ERCs are particularly sought after in the buy-to-let (BTL) sector, as many landlords like to regularly refinance to free up capital for other investments.
While some no ERC IO mortgages are available, stricter eligibility criteria may apply, and borrowers should be wary of incurring higher arrangement fees and other administrative costs.
No ERC fixed-rate mortgagesERCs are typically seen as part and parcel of a fixed-rate mortgage deal, since you’re (usually) receiving a fixed, competitive rate in exchange for your long-term loyalty
That being said, a handful of fixed rate deals without ERCs have appeared on the market in recent years - but beware of enhanced arrangement fees and other associated costs
No ERC equity release mortgagesDue to the nature of this type of mortgage there aren’t a huge number of no ERC options available; lifetime mortgage customers, for example, aren’t typically looking to repay the loan in this lifetime at all, let alone early.
That being said, there may be a limited number on the market, although many lenders waive ERCs after a certain number of years, and there are often exemptions if you sell your property, or if a homeowner dies.
Advantages of no ERC mortgagesIt’s easy to see why mortgages that come without early repayment charges can be appealing, and they can be particularly beneficial to certain types of borrowers. Some of the pros of no ERC mortgages include:
They offer more flexibilityIf you’re hoping to move within the next few years, or prefer to have the option not to be tied down so you can chase the most competitive deals, no ERC mortgages allow you to remortgage or switch lenders without consequence
Peace of mindSimilarly, those with variable incomes (e.g. self-employed contractors) have the option to overpay during periods of higher earning without the worry of incurring a penalty
They may save you moneyGenerally speaking, no ERC mortgages are well-suited to those who are likely to have a change in circumstances in the near future.
The rates may not be as competitive, but what you pay in additional interest may still outweigh what you’d lose in fees if you wanted to overpay or switch lenders during the ERC period.
Disadvantages of no ERC mortgagesSecuring a mortgage deal that doesn’t come with ERCs attached seems like a no-brainer to help safeguard for the future, regardless of your circumstances. But there are some drawbacks to be aware of:
They can be more expensiveThe main reason borrowers can be put off no ERC mortgages is because they usually cost more. Interest rates tend to be higher, and there may be additional, or more pricey, arrangement fees to consider
It’s important to factor all these costs into the equation before committing to an ERC mortgage. If you need a hand, a mortgage broker can help identify the most competitive ERC and non-ERC deals, and calculate which is the most financially viable based on your specific circumstances.
Fewer lenders to choose fromDepending on the type of mortgage product you’re after, you may be limited in choice of lenders offering no ERC mortgages. This can further impact how competitive the interest rates you’re offered are.
Since the market is less competitive for no ERC lenders, they can also afford to be more particular about who they lend to. Many ERC mortgages have more stringent lending criteria than you’d typically expect, and as ever, the most competitive rates will be reserved for those with spotless credit files, good affordability and high deposits.
How to avoid early repayment chargesIf you’re looking to overpay on your mortgage or switch to a more competitive deal with another lender, there are a few options available if you want to avoid early repayment charges.
Overpay at the right timeMany mortgage providers allow you to overpay on your mortgage by around 10% each year. Overpaying within your lender’s agreed limit can help you save money on interest in the long-term, but it’s worth contacting your lender or a broker before you do so.
Move lenders at the right timeWhile many lenders have substantial ERCs for those who are still within their introductory mortgage, if you’ve only got a few years remaining, some are happy to waive the charge any charges you might incur for switching lenders.
Port your mortgageIf you’re looking to move home, you don’t necessarily need to switch mortgage providers. You may have the option to port your mortgage with your current lender and save on the associated fees - although that’s not to say a different provider won’t offer you a more competitive deal.
Wait it outIf all else fails, you could simply wait out the ERC period. Some mortgage providers only enforce them for a particular time period, so depending on your lender and how far into the term you are, you might not have long to wait. It’s always worth checking with your lender before exploring other options
Discuss your no ERC mortgage options with a brokerIf you want to put down roots but the future is a bit uncertain, no ERC mortgages can be a great, flexible option to work around your lifestyle - but they’re not for everyone.
Why not discuss your options with an independent broker for impartial, no obligation advice? If a no ERC mortgage is deemed the best way forward, our team of expert advisors can point you in the direction of lenders offering the most suitable terms, and competitive deals, for your circumstances. Tell us a bit more about you and your situation by dropping us a message via our online enquiry form, and one of the team will be in touch. Alternatively, pick up the phone and give us a call directly on X to discuss your no ERC mortgage.