A borrower may find a lower mortgage rate, decide to sell a property or want to release equity—only to discover that leaving the existing deal will trigger an early repayment charge worth thousands of pounds.
An Early Repayment Charge, usually shortened to ERC, can change whether a remortgage, sale or restructuring exercise is financially worthwhile.
The charge should therefore be checked before making plans, not after a new application has begun or a sale has been agreed.
What is an Early Repayment Charge?
An ERC is a charge that can apply when all or part of a mortgage is repaid during a specified period.
It is commonly associated with fixed, discounted and some tracker mortgage products. In return for the product’s rate or other features, the borrower agrees to restrictions on repaying or replacing the loan early.
The charge might apply if the borrower:
- Remortgages to another lender.
- Sells the property and repays the mortgage.
- Makes an overpayment above the permitted allowance.
- Refinances to release equity.
- Replaces a buy-to-let mortgage with development or bridging finance.
- Restructures borrowing across a property portfolio.
- Repays the mortgage using savings or sale proceeds.
The exact terms depend on the individual mortgage contract.
How is the charge calculated?
Many ERCs are calculated as a percentage of the amount being repaid.
For example, a 3% charge on a £200,000 mortgage balance would be £6,000. If the charge fell to 2% the following year, waiting until that point could reduce the cost to £4,000, assuming the balance remained the same.
Some products use a reducing structure, such as:
- 5% during the first year.
- 4% during the second year.
- 3% during the third year.
- 2% during the fourth year.
- 1% during the final year.
Others maintain the same percentage throughout the deal or use different calculation methods.
The ERC period may also continue beyond the initial rate in some circumstances, so the dates and mortgage conditions must be checked rather than assumed.
Where can borrowers find the information?
Details may appear in:
- The original mortgage illustration.
- The formal mortgage offer.
- The lender’s terms and conditions.
- The latest annual mortgage statement.
- The borrower’s online mortgage account.
- A redemption statement supplied by the lender.
A redemption statement provides the amount required to repay the mortgage on a particular date. It may include the outstanding capital, ERC, administration fees, unpaid interest and other charges.
The figure can change as payments, interest and the intended repayment date change. Borrowers planning a sale or remortgage should obtain an up-to-date figure rather than relying on an estimate from several months earlier.
A lower rate does not automatically produce a saving
A new mortgage may have a lower monthly payment, but the cost of leaving the existing deal must be recovered before the switch creates a genuine saving.
Imagine a remortgage would reduce the payment by £200 a month but trigger a £6,000 ERC. Ignoring all other costs, it would take 30 months to recover the charge.
The complete comparison should also include:
- Product or arrangement fees.
- Valuation and legal costs.
- Broker fees where applicable.
- Mortgage discharge or administration charges.
- Any incentives provided by the new lender.
- The cost of remaining on the existing mortgage.
- The period for which the new deal is expected to be retained.
- Interest charged on fees added to the mortgage.
A cheaper rate can still be worthwhile, but the decision should be based on total cost rather than the headline payment.
Selling does not necessarily remove the charge
Some borrowers assume that an ERC only applies when remortgaging. It can also apply when the property is sold and the mortgage is repaid during the restricted period.
For a landlord, this can reduce the net proceeds available for the next purchase or create an unexpected gap in a wider portfolio plan.
The cost should be included before setting an acceptable selling price or committing the proceeds elsewhere.
A borrower who is considering selling soon may prefer a mortgage with a shorter restriction period, a lower ERC or greater flexibility, even if another product initially appears cheaper.
Does porting avoid the ERC?
A mortgage described as portable may potentially be transferred to another property, but porting is not automatic.
The lender will normally reassess the borrower, the new property and the requested loan. Changes in income, affordability, credit history, property type or lender criteria could prevent the transfer.
Additional borrowing may also be placed on a different product, producing two mortgage parts with separate rates, expiry dates and repayment charges.
Depending on the lender’s process, an ERC might initially be charged and later refunded when the new mortgage completes. The timing and conditions should be established before relying on porting as the solution.
Overpayment allowances need checking
Many mortgages permit a limited amount to be overpaid without an ERC, but the allowance is not universal.
It might be calculated as a percentage of the outstanding balance, original loan or another figure. The allowance could operate by calendar year, mortgage year or product year.
Borrowers should also confirm whether regular and lump-sum overpayments are treated differently and whether unused allowances can be carried forward.
Paying even a small amount above the permitted limit could trigger a charge on the excess. Contacting the lender before making a substantial payment can prevent an avoidable mistake.
ERCs can restrict landlord strategy
For landlords, early repayment charges can affect more than one property.
A landlord may want to:
- Sell an underperforming rental.
- release equity for another purchase.
- consolidate several mortgages.
- transfer properties into a company.
- refinance after refurbishment.
- reduce borrowing across the portfolio.
- change the property from one letting model to another.
If several mortgages have overlapping ERC periods, the combined exit cost can make restructuring uneconomic.
A mortgage with the lowest initial rate may therefore be less suitable than a slightly more expensive product offering lower charges, shorter restrictions or more generous overpayment terms.
Compare paying the charge with waiting
An ERC does not always mean the borrower should abandon the proposed change.
There may be circumstances where paying it is still commercially sensible, particularly if a sale is necessary, a new rate creates sufficient savings or refinancing enables a valuable opportunity.
The comparison should consider:
- The exact charge today.
- When it reduces or ends.
- The cost of waiting.
- The benefit of acting immediately.
- All fees attached to the replacement mortgage.
- Whether rates or lender criteria could change.
- The borrower’s intended plans for the property.
The answer depends on the figures and the borrower’s priorities.
Build mortgage expiry dates into the calendar
Landlords with several properties should record product end dates, ERC reduction dates and permitted overpayment allowances.
Beginning a mortgage review three to six months before the existing deal ends can provide time to compare a product transfer with a wider-market remortgage and prepare the required documents.
Where a sale, purchase or refurbishment is planned, the review may need to begin even earlier.
Check the exit before selecting the product
The mortgage decision should consider how the borrower may need to leave the deal as well as how they will enter it.
NetRent Mortgage Solutions can help borrowers and landlords compare rates, fees, early repayment charges and product flexibility through DNA Financial Solutions.
To discuss a purchase, remortgage or future exit strategy, contact NetRent:
Telephone: 01352 721300
Email: mortgages@netrent.co.uk
NetRent does not provide legal advice. This article represents our general understanding of the landlord mortgage and rental property market and is provided for information only.
Mortgage products, rates, fees and lender criteria can change. Individual circumstances vary, and appropriate mortgage, financial, legal and tax advice should be obtained.
Your home may be repossessed if you do not keep up repayments on your mortgage.