What is an Early Repayment Charge? (2024)

How to avoid paying an early repayment charge

You can take several steps to avoid paying an early repayment charge.

Get a mortgage without charges

Your lender may offer a mortgage deal without early repayment charges – ask about this when agreeing your deal. Some fixed rate mortgages don’t include early repayment charges, or you may be able to avoid paying one after repaying for a number of years.

Overpay at the right time

Overpaying under the limit each year could help you save money on interest in the long term. If you have a mortgage with us, you can overpay up to 10% each year. Always contact your lender before overpaying on your mortgage.

Move lenders at the right time

Lenders may waive any charges you might incur for switching lenders if you only have a few years left on your term.

Port your mortgage

If you move home, you might be able to port your mortgage and stick with the same provider.

Avoiding the Standard Variable Rate

Once your mortgage deal ends, you'll be moved onto your lender's Standard Variable Rate. This can mean paying more interest. If you're sticking with the same lender, make sure you arrange a new deal to coincide with your previous deal ending.

This way, you can avoid being placed onto a Standard Variable Rate. Make sure you're not liable for an Early Repayment Charge when doing this.

What is an Early Repayment Charge? (2024)

FAQs

What is an Early Repayment Charge? ›

If you pay off your mortgage early, or overpay by more than your lender allows, you may have to pay an early repayment charge. This is so your lender can make up for the lost interest they would have made over the remainder of your mortgage agreement.

How do I avoid early repayment charges? ›

How to avoid early repayment charges on a mortgage. If you want to avoid paying an early repayment charge on your mortgage then you should: Avoid overpaying your mortgage by more than allowed under the terms of your mortgage deal - usually 10% of the outstanding balance each year.

What is an example of an early repayment charge? ›

For example, if you had a 5 year fixed interest rate mortgage, you'd start off with a 5% ERC in year 1, which reduces to 4% in year 2 then 3% in year 3 and so on. So, if you're closer to the end of your mortgage term your early repayment charges could be lower.

Is it worth paying an early repayment charge? ›

Paying an early repayment charge can make sense if: You can get a remortgage deal with a much lower monthly payment than your current one. If you find a deal with a rate that's lower than your current one , use our Ditch your fix calculator to check whether it's worth paying to switch.

Should I pay early repayment charge to switch mortgage? ›

You can't avoid paying the ERC unless you wait until your mortgage deal ends and no fee applies. However, if the ERC is lower than the interest rate on your current deal or if you're switching to a cheaper mortgage, you may find that over time the lower interest rate outweighs the cost of the ERC.

Do lenders ever waive the early repayment charge? ›

Some lenders may waive the early repayment charge if you've only got a few months left on your mortgage deal. However, this is often only the case if you take out a new mortgage with your current lender – known as a product transfer.

Can you negotiate a mortgage early repayment charge? ›

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.

Is early repayment good? ›

Paying off a loan early could save you money in the long term as it can reduce the total amount you need to repay. Bear in mind that you need to account for any early repayment charges to help decide if it's the right choice for you.

Are early repayment fees legal? ›

Remember, federal law prohibits prepayment penalties above 2 percent of the loan amount. This is the highest possible amount you could pay. Keep in mind: Dodd-Frank's rules apply to conventional fixed-rate mortgages originating as of January, 2014.

How to get out of a mortgage without penalty? ›

How To Get Out Of Your Mortgage Legally
  1. Talk To Your Lender. Homeowners who find themselves under financial duress are advised to speak with their lender as soon as possible. ...
  2. Sell Your Home. ...
  3. Request A Deed In Lieu Of Foreclosure. ...
  4. Have A Short Sale. ...
  5. Let Your House Go Into Foreclosure. ...
  6. Strategic Default.

Does early repayment affect credit score? ›

Paying off the loan early can put you in a situation where you must pay a prepayment penalty, potentially undoing any money you'd save on interest, and it can also impact your credit history.

Why do banks charge for early repayment? ›

The purpose of a prepayment charge is to compensate the lender for the economic costs it incurs when a prepayment amount exceeds the prepayment privileges permitted under the mortgage.

Does early repayment reduce monthly payments? ›

These overpayments help you pay off your mortgage sooner but your monthly payment stays the same.

Is there any way to avoid early repayment charge? ›

Get a mortgage without charges

Your lender may offer a mortgage deal without early repayment charges – ask about this when agreeing your deal. Some fixed rate mortgages don't include early repayment charges, or you may be able to avoid paying one after repaying for a number of years.

Is there a downside to paying off mortgage early? ›

The Downside of Mortgage Prepayment

Prepaying your mortgage ties up your funds in your home, potentially leaving you with less liquidity for other financial needs or opportunities.

What is the penalty to pay off a mortgage early? ›

The interest rate differential (IRD) is one type of prepayment charge you may be required to pay to your lender when you pay all or part of the mortgage before the term ends. For most fixed-rate closed mortgages, the prepayment charge is usually 3 months' interest or the IRD, whichever is greater.

How do I avoid early payoff penalty? ›

Negotiate To Remove The Prepayment Clause

You can always try to negotiate having it removed from the contract; ask your lender if they will waive the fee. If they agree, make sure you have it in writing. You can also ask your lender for a quote without the penalty, but remember, that might increase your interest rate.

How do I avoid prepayment charges? ›

By carefully reviewing the loan terms, negotiating with lenders, and considering loans without prepayment penalties, you avoid unnecessary costs. Always read the details and look at every alternative that will enable you to make informed choices.

How early can I pay off my mortgage without penalty? ›

You can't prepay, renegotiate or refinance a closed mortgage before the end of the term without a prepayment charge. But, most closed mortgages have certain prepayment privileges, such as the right to prepay 10% to 20% of the original principal amount each year, without a prepayment charge.

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