Early repayment charges: How to minimise costs

Alongside mortgage arrangement fees, there are other costs to consider when taking out a mortgage. Early repayment charges (ERC) fall into this category; this is the fee your mortgage lender may charge if you choose to make extra mortgage payments beyond the 10% per year overpayment limit usually applicable or settle your mortgage early in full.

You don’t have to accept high ERCs as a given though. Read on to discover our top tips for minimising this mortgage cost…

Know the true cost of ERCs

Early repayment charges are common across fixed rate mortgage products, but can be found on tracker or discounted deals too – and they could cost you dear as the HomeOwners Alliance details:

“If you have a mortgage balance of £200,000 on a 2 year fixed rate mortgage and it has a 2% charge for the first year, the ERC would be £4,000. If this steps down to 1% in the second year, assuming your ERC is based on the outstanding balance of your mortgage and that this has reduced to £190,000, the ERC would be £1,900. But if you took out a 10 year deal and have a mortgage balance of £200,000 and there’s a 5% fee for the duration of the term, the ERC would be £10,000.”

By understanding the cost of your early repayment charges early, you can plan your next financial move with ease, whether you are tied up in a fixed mortgage deal or considering your remortgage.

Consider fixing carefully

While fixing your mortgage unlocks a number of benefits, there are some drawbacks, and this often comes in the shape of an early repayment charge.

When choosing a fixed term, think about what the future might bring and how that will affect your living situation. Potential moves, family plans, career changes and retirement timing should all influence your decision about the length of your fixed term.

Look beyond the lowest rate

When picking a new mortgage product, look beyond the lowest interest rate. In most cases, opting for a product with a slightly higher interest rate can mean lower ERCs and increased flexibility, especially when it comes to overpayments and portability. All this means you could be saving money in the long run.

Overpay or exit strategically

You’ll find annual overpayment allowances across most mortgage products, with 10% usually the figure given by most lenders. To minimise or avoid ERCs, don’t exceed this allowance.

Strategic timing is especially useful when making large overpayments or leaving your deal completely. Most ERCs are structured on a sliding scale with the highest ERC rates on a fixed mortgage typically found in year 1 and decreasing as time goes on. By timing large overpayments or your remortgage with this in mind, you can stay as close to penalty-free as possible!

Seek mortgage advice now

To avoid early repayment charges, we’d always recommend seeking advice from the professionals. Our independent mortgage brokers can help you save in the short and long term, keeping ERCs to a minimum and ensuring better financial sense for you. Contact our team today to discuss your next steps.