Early Repayment Charges (ERCs) are fees that mortgage lenders charge when you repay your mortgage, or a portion of it, earlier than agreed upon in your mortgage contract. These charges are primarily designed to compensate the lender for the interest they would lose if you pay off your mortgage early.
1. Why ERCs Exist
Lenders set interest rates based on the expectation that borrowers will make payments over the entire term of the mortgage. When you repay early, the lender receives less interest than anticipated, potentially leading to financial loss. ERCs help offset this loss.
2. When ERCs Apply
ERCs typically apply during the “initial period” of a mortgage deal. This is often a fixed-rate or discount period that lasts between 2 to 10 years. If you exit the mortgage during this period, you’ll likely incur an ERC. After this period, you can usually switch to a different mortgage deal or repay without penalty.
3. How ERCs are Calculated
The calculation of ERCs varies among lenders but is usually based on a percentage of the outstanding mortgage balance. Commonly, the percentage decreases over time. For example:
- Year 1: 5% of the outstanding mortgage balance.
- Year 2: 4% of the outstanding mortgage balance.
- And so on, until the charge is no longer applicable.
4. Types of Mortgages with ERCs
- Fixed-Rate Mortgages: Often have ERCs during the fixed-rate period.
- Discount Mortgages: May have ERCs during the discount period.
- Tracker Mortgages: Some may come with ERCs, especially if they have an initial deal period.
- Flexible Mortgages: These typically do not have ERCs, but it’s essential to check the terms.
5. How to Avoid or Minimize ERCs
- Porting Your Mortgage: If you move home, you might be able to take your current mortgage with you to avoid ERCs.
- Overpayment Allowance: Many mortgages allow you to overpay a certain amount each year without incurring ERCs. Typically, this is around 10% of the outstanding balance.
- Switching After the Initial Period: If you wait until the initial period ends, you can switch deals without facing an ERC.
6. Is It Worth Paying an ERC?
Sometimes, paying an ERC might be worth it, especially if you can secure a much better mortgage rate or if you’re selling your property and need to clear the mortgage. However, it’s crucial to do the math or consult with a financial advisor to determine whether the savings outweigh the cost of the ERC.
7. Examples of ERCs
- Example 1: You have a £200,000 mortgage, and you decide to repay it after one year. If the ERC is 5%, you would pay £10,000.
- Example 2: In the second year, if the ERC drops to 4%, you would pay £8,000 on the same balance.
8. Key Considerations
- Check Terms Carefully: Always read the fine print of your mortgage agreement to understand the specifics of any ERCs.
- Plan Ahead: If you anticipate needing to pay off your mortgage early, consider choosing a deal with lower or no ERCs.
- Seek Professional Advice: Consulting with a mortgage broker or financial advisor can help you navigate ERCs and potentially save money.
ERCs are a significant factor in mortgage planning. Understanding how they work and how to avoid them can save you a considerable amount of money over the life of your mortgage.